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Former oilman, turned MP, speaks out on oil prices

Gordon Copeland Press Release
For Immediate Release
Monday, 12th May 2008

Former oilman, turned MP, speaks out on oil prices

Independent MP Gordon Copeland, the Kiwi Party spokesperson on Commerce, today added his voice to the growing chorus of concern about the increasing price of petrol and diesel.

“In some ways, I am perhaps uniquely qualified to comment on this issue,” said Mr Copeland. “I spent fourteen years in the oil industry – seven of them with BP – in both London and New Zealand.”

Gordon Copeland was the Chief Financial Officer of BP in New Zealand and a Director of the New Zealand Refining Company in Whangärei until May of 1980.

“The rapid increase in the international price of oil in 2008 is very similar to the situation which existed in the late 1970s and early 1980s.”

“I think the Automobile Association and others are right to be distrustful of the recent enormous surge in oil company profits when it goes hand in hand with increasing prices at the pump.”

“Normally in business it is the other way round. If, for example, the price of steel goes up, and with it the price of cars, then the car companies margins get squeezed because their sales drop away. So why does it operate differentially when it comes to oil?”

“Part of the answer if that unlike cars, the demand for oil is inelastic. In addition though, the oil companies argue that they must immediately generate extra cash at the pump when oil moves from say $80 per barrel, to $100 per barrel, to pay the extra $20 needed.”

“However, even some executives in the oil industry itself, have qualms of conscience about that extra $20 coming immediately from the customer. They argue that funds should also be sourced from new capital. That is because when the price of oil goes up, the value of inventories and the size of the company also increase. The increase in the value of the inventories could therefore be financed from new debt or equity rather than through an immediate increase in the price at the pump.”

“A subsequent drop in price from $100 to $80 would then reduce the cash requirement at which point the price at the pump could come down immediately, and capital could be repaid.”

“In light of the above, it is interesting to look at Shell International’s first quarter 2008 results.”

“Their profit rose to $US 9.1 billion – up by $1.8 billion or 25%, from $US 7.3 billion for the equivalent quarter in 2007. However sales volume rose by just 7%. Inventories, reflecting the higher value of oil, rose from $US24 billion to $US32.2 billion; an increase of $US8.2 billion or 34.2%.”

“So did Shell fund all of the price increase from their customers or raise new capital through borrowings or new shares?”

“In fact, they borrowed not one extra cent! Their debt which stood at $US19.4 billion on 31st of March 2007, decreased slightly to $US19.3 billion a year later. This decrease in debt, coupled with the enormous surge in profit over the same period, actually reduced the company’s gearing ratio from 14.6% (debt as a percentage of debt plus equity) to just 12.7% a year later. At the same time, the company’s total equity surged from $US 113.5 billion in March 2007 to a whopping $US 133.2 billion 12 months later, and that was after repurchasing $US1.3 billion worth of shares and paying a handsome $US2.3 billion dividend!”

“It seems clear to me that the ‘let’s whack it all on to the price at the pump’ brigade is well and truly in charge at Shell. The ‘it would be fairer to raise new capital’ people in the company (assuming they exist at all) didn’t get a look in!”

“New Zealand is at the end of the oil supply chain, so there is little we can do, but the international community needs to call the oil giants to account on this issue.”


© Scoop Media

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