Daily Telegraph: Go on, fill 'er up - it'll boost your pension: “Shell, for example, is spending $15 billion a year looking for more black stuff (or for methane, which is almost as valuable) yet it is still returning capital to the company's owners. It argues, sensibly enough, that it's already exploiting every worthwhile project it can find, and that it's not a bank. If it needs capital in a year or five, the market will provide it, provided investors can be confident that the profits won't be confiscated.”: Monday 15 August 2005

By Neil Collins

(Filed: 15/08/2005)

Do your eyes water as you pour ever larger sums into your petrol tank? Do you alternately curse the Chancellor for taxing it, and the oil companies for making such vast profits at your expense?

Calm down, dear, it's only the iron law of supply and demand. Besides, petrol isn't really that expensive. Adjusted for inflation, it's been 90p a litre before - several times, in fact, in 2000, 1986, 1981 and 1974 to be exact. Since then, your income will almost certainly have gone up faster than inflation (since incomes always do, except in times of recession) and the car you drive will have become more frugal, unless, of course, you have traded up to a bigger model.

It may not feel that way as another £50 disappears into your motor, but this is why a rise in the oil price which not so long ago might have caused panic, shortages and recession is making so little impact on our economic wellbeing. Last time the oil price doubled in 18 months, more than 30 years ago, we came within an ace of a return to petrol rationing.

Today, the very idea seems absurd. We may have less to spend in the shops after filling the car, but there is no talk of an oil price shock; since the 1970s, we've learnt to use it more carefully. Economic growth will be pretty modest this year, but we shall still be richer in December than we were in January.

Petrol costs 90p a litre because that is where supply and demand balance. Next week, the balance may be 88p, 92p or even £1, but it will still balance. The point is illustrated by looking at the price of diesel, or derv as Sir Geoffrey Howe used to call it, as he whacked another few shillings on to a gallon when he was chancellor. Diesel is less refined than four-star so, other things being equal, it should be cheaper, even after Gordon Brown scrapped the tax concession it used to enjoy.

Other countries, with more enlightened governments, encourage diesel because a diesel engine is a more efficient way of using the energy locked up in a barrel of oil. So effective has this policy been that diesel is now in short supply worldwide, because refineries cannot be quickly modified to meet the demand.

According to one authoritative survey last week, that shortage is going to get a lot worse over the next decade, unless oil refiners make big investments in extra capacity to meet the rising demand. Yet owners of diesel cars need not worry about being unable to fill their tanks - they may just have to pay a premium to do so.

It's often not appreciated just what a powerful mechanism pricing is; not only does the price send out a signal about the state of the market (in anything) but a rising price chokes off demand while giving the supplier the cash to find more of his product.

A falling price does the opposite. Where this mechanism is absent - the provision of state-funded services is the most obvious example - even the most dedicated bureaucracy cannot provide a decent match to supply and demand.

Government interference is a contributing factor in today's high oil price - not our Government, for a change, but those of countries where the oil is found. Many of them now have agreements with the oil companies which insist on their extracting less oil when the price goes up. This helps the country keep its domestic finances stable, but at a cost of more instability in the market, since it chokes off supply at the higher price, driving it up still further.

With crude at a record $65 a barrel, the oil companies are making profits like never before. They literally have more money than they know what to do with (so we may be sure they will upgrade their refineries to make more diesel just as fast as the environmentalist lobby will let them) and are reduced to giving capital back to the shareholders.

At first sight, this looks like an invitation to the Government to hit them with a windfall tax. In fact, it's supply and demand in action again. The oil price has risen so far and so fast that the world's geologists have never been so popular.

Essentially, they are all employed. Shell, for example, is spending $15 billion a year looking for more black stuff (or for methane, which is almost as valuable) yet it is still returning capital to the company's owners. It argues, sensibly enough, that it's already exploiting every worthwhile project it can find, and that it's not a bank. If it needs capital in a year or five, the market will provide it, provided investors can be confident that the profits won't be confiscated.

As all but the nuttiest Left-wingers have worked out, it makes no sense to steal the shareholders' assets, especially as the bulk of oil company profits are earned overseas. British companies paid out £39 billion in dividends last year, and £5 billion of that came from BP and Shell, so it's not much of an exaggeration to say that one pound in every eight paid to members of UK pension funds came from the industry. We are fortunate that two of the world's top three oil companies are British. It may not save you anything at the pumps, but it's a comfort to know that not all the money you pour down the tank is wasted.

http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2005/08/15/do1502.xml

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