30 April 2008
In defence of Shell and BP

Yesterday, the oil giants Shell and BP announced record profits.  One oil industry analyst put it down to high oil prices.  All the oil companies were doing was watching the money roll in.  Which prompted the usual whining about “obscene/outrageous” profits etc. 

I am against this whining as I believe that profits are good1. However, I have to confess that I am a bit stumped to say why bumper profits are so good in this case.  I find it difficult to see where the value has been created.  I suspect that the value was created a few years ago when these oil companies invested heavily in new capacity (although I really have no idea if they did or not).  The profits they are enjoying now is simply the payback for risks they took then.

If so, then they are richly deserved.

Or maybe, actually, they didn’t invest nearly enough which meant that oil demand exceeded oil supply leading to the increase in price.  Sure, that meant that their profits went up but not by as much as they might have done.

Footnotes

1.  See Profit is good or Profits in a Market Economy, Art Carden

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