Troubled oil
JOHN BULL
If you ask an oilman what has been the roost worrying event in his industry during the past ten days he will mention the Iraq Petroleum Company settlement with Syria first and then the outbreak of price cutting in the United Kingdom market. Conditions in the Middle East remain the pressing problem, though the sight of trouble at both ends of the pipe line is somewhat unnerving.
This global view, which sees the United Kingdom market as a sideshow, should not blunt appreciation of Esso's savage initiative. Simple arithmetic makes the point. Esso's top grade used to cost 5s 9d, of which 3s 7d went to the Government in tax, leaving 2s 2d. Out of the 2s 2d the retailer took 6d or so. At the end of the day, Esso had Is 8d left for each gallon. What it has done is to take 34d off its own price, which amounts to a cut of 17# per cent in revenue, and lopped RI off the dealer's margins.
Profit figures for the United Kingdom market are hard to come by. Esso made £3.7 million before tax in 1965, Shell-Mex and BP reached £5.6 million. These are not large amounts and they will undoubtedly be swamped by the cost of the cuts, at a guess £7 million to £10 million for Esso, £10 million to £15 million for Shell- Mex. But these figures are completely dwarfed by those of, say, the two parent companies of Shell-Mex.
Looking at published figures without any other guide can, however, produce a distorted picture. As international operations, oil com- panies try to arrange for profits to pop up where tax rates are lowest. Certainly it would be a mistake to view Shell-Mex as a compara- tively trivial business because its published pro- fits reach some £5 million to £10 million or so.
Having, none the less, accepted the message that shareholders should not ditch their oil company shares on account of United King- dom market developments, one turns to look at the Syrian settlement with some trepidation. Again one is met with comparatively small figures. The oil companies which make up Iraq Petroleum (1Pc)--BP and Shell among them— have in effect agreed to raise what they pay the Syrians in transit dues from £10 to £15 million.
This agreement represents, or can be made to appear, a complete capitulation by the Western oil companies to Syrian demands. The message will not be lost on Syria's neighbours. Secondly, the agreement leaves open the ques- tion of Iraq's position. During the twelve weeks that the trans-Syria pipeline has been out of action, Iraq oil has been largely shut in—the second route to the sea, via the Persian Gulf, has limited capacity. The latest news on this front is disturbing.
Iraq is reported to have asked IPC to pay
normal royalties for the first quarter of the year, which is £23 million more than produc- tion justifies owing to the shut down. Iraq says quite simply that the crisis involving Syria was not of a nature that would allow the company to withhold royalties, so the pace is quickening up. And, of course, the Syrian imbroglio fol- lows by a few months a serious face-to-face between Iranian Oil Participants and the Shah of Persia which resulted in major concessions by the oil companies.
Finally, from the Sublime to England's garage owners, of which a number are quoted on the stock exchange: how seriously affected are they by Esso's initiative? The recent Ken- ning Motor Group report provides what might prove to be a typical answer. Against pre-tax profits approaching £2 million, the cut in dealer's margins on petrol sales will cost the company about £50,000, using its annual turn- over figure of 23- million gallons of motor fuel. The bulk of profits come from car sales, another depressed sector, although there has been the suggestion of a recovery in the past two months. The petrol price war, therefore, is not going to send either oil companies or big garage groups to the wall. It just tightens the screw a little.
Previous page
