Fuel Pricing?

Plain talk on the oil price

Fuel prices are the highest they’ve ever been.  We know that’s hurting. We hear this every day from our customers, our employees and their families.  Why does fuel cost this much, and what are we doing to help?

The main reason is that demand is growing faster than supply.  Rapid economic growth in Asia has virtually exhausted the world’s surplus production capacity. So prices have risen steeply for many commodities, including crude oil.  

There is little that Shell can do about this.  Although we are one of the largest of the world’s 3,500 oil companies, we produce only around 2.5% of the world’s crude oil. To supply the 44,000+ Shell branded petrol stations worldwide, we have to buy over half of our raw gasoline and diesel from the open market. Just like our customers, we’re exposed to daily price fluctuations.

Fierce competition makes fuel retailing a high-volume, low-margin business. Most of our profit comes from production of oil and natural gas.

A large slice of the cost of a barrel goes to the countries where the oil is taken out of the ground as royalties and taxes. Most governments also apply tax when it is bought at the pump -- in some European countries, this can represent as much as 50% or more of the price drivers pay.

Of course, as the price of a barrel goes up, we make more money. And as one of the world’s largest companies, our profits are large. So, what are we doing with that money?

We’re using it to fund the largest investment program in our history and in our industry to boost supply and find new alternatives to oil.  Demand will continue to grow, so lower prices depend on more supply and more choice in fuels.

In 2007, our capital investment increased to $27.1 billion and we expect it to grow this year. The number of projects we have under construction has more than doubled since 2004 and we have over 50 large oil and gas projects underway, as well as many more smaller ones. Many of these are in increasingly difficult and costly locations like the Arctic and in deep offshore waters where the technical challenges are immense.

We’ve stepped up our investment into transport biofuels, particularly those using more sustainable advanced technologies. And we are producing liquid fuels from natural gas and unconventional sources like Canada’s oil sands.

We are introducing new fuel economy formulas and offer advice on fuel-efficient driving that help customers get more miles from each gallon or litre. Our work with vehicle manufacturers supports the introduction of more efficient engines. And we are investing in renewable energy sources like wind power.

Our profits are big, but so is the challenge ahead. We are investing massively now to help meet that challenge. It will take time before the full effect of these investments is felt, but in an industry that thinks in decades, they are essential to ensure we can help supply the fuel consumers will need for years to come.