Shell responds to queries about fuel prices

Why are gasoline prices so high? If oil companies are making record profits, why can’t they give drivers a break and reduce prices at the pump?

Chances are you’ve been asked those questions by customers, friends or family members in recent months – and you may feel you have not been able to give them a good enough answer. That’s because gasoline pricing is both an emotional and poorly understood subject for consumers. It’s a reputation issue for Shell and the oil industry as a whole, made worse when high crude oil and gasoline prices coincide with record financial results.

Consumers find it difficult or impossible to accept that when crude prices are high, energy companies continue to reap large profits without reducing pump prices. In fact, despite record profits, the price at the pump continues to rise. Another criticism is that oil companies are seen to be quick to raise gasoline prices following crude increases, but slow to pass on price decreases, frequently leading to accusations of “profiteering.”

Shell recognises that customers across the globe are concerned and affected by the price of fuel. In every country where Shell operates, Shell strives to provide customers with a consistent supply of competitively priced fuel.

Here are Shell's answers to some frequently asked questions about fuel prices:

Why does the price of gasoline continue to rise?
Gasoline prices are determined by a set of unique conditions within different localities and vary widely around the world. In many countries, the largest single element is not the cost of crude oil, but rather government taxes. In some European countries, taxes can represent as much as 75% of the price the customer pays at the pump.

Nevertheless, the cost of crude is significant and, in countries where gasoline taxes are lower, it is the major factor in the cost of gasoline. Crude oil is trading well above $100 per barrel on the open market, and is being driven by the world’s growing demand for energy. Finally, the price of gasoline also needs to include refining, distribution and operating costs. So the margin left for oil companies is usually a small percentage of the pump price – much lower than most customers realize.

Worldwide demand for crude oil and refined products has increased rapidly in recent years, led by the explosive growth of the economies in China, India and other Pacific Rim nations, and the supply of crude has been hard put to keep pace with that demand. Some people suggest that crude prices also are being elevated by geopolitical tensions and, possibly, by financial speculators. To whatever extent these factors exist, they are beyond our control. We must deal with the market as it is, and in this regard, supply and demand prevail.

Don’t the major oil companies control the crude market?
There are more than 3,500 oil companies in the world. Shell produces only 3% of the world’s crude, and we refine more crude oil than we produce. Shell, therefore, must purchase oil on the spot market to meet refining and retail demands. As a result, Shell is subject to market fluctuations in price and supply, as are other oil companies. Crude prices in each country are set by supply and demand, and are influenced by such factors as OPEC supply restrictions, weather, stock levels and the sentiment of financial markets.

Oil companies continue to report record earnings. Aren’t they just profiteering from high crude oil and gasoline prices?
The energy industry is one of the world’s largest and most complex industries. Profits are large because the business is large, with very large investments. Strong earnings among all the major oil companies enable reinvestment in both the upstream and downstream parts of their businesses. The industry is spending at record levels to increase supply to meet the growing global demand for energy.

Why can’t oil companies use their upstream profits to subsidise pump prices?
Producing crude oil involves long-term and high-risk projects requiring billions of dollars in investment over 20-to-30 years. Higher profits in some periods help safeguard investments when oil prices -- and profits -- are lower at other times.

What is Shell doing to increase crude supplies?
In line with our strategy of “more upstream and profitable downstream,” we are directing about 80% of our $27 billion capital spending programme for 2008 into upstream projects. This is the largest capital spending programme in Shell history, and the largest in industry. In total, we have some 10 billion barrels of upstream resources under development, which will add around 1 million barrels per day of production.

Does Shell set the pump prices at its sites?
This varies according to country and the operating model of each site. In some countries, pump prices are set by the government, and Shell and other retailers must comply. In many countries, some sites are owned by Shell and some are owned by independent dealers. Shell works very hard to maintain competitive prices at the pump – it is not in our best interest to do otherwise. For dealer-operated sites, the dealers own the fuel on their sites and, by law, have the right to set prices as they see fit. Dealers also have to compete rigorously with competitors so it’s in their best interest to price competitively at the pump as well.

Throughout the world, the retail industry is extremely competitive. In most countries, companies have to display pump prices so customers can make a choice. Even where pump prices are set by governments, companies compete strongly in a range of other areas, including design, visibility, convenience/location, customer service, prices of other products and availability of other services.

Does Shell engage in price gouging at its retail sites?
Shell does not engage in or condone the practice of introducing excessive price increases, and will investigate any such allegations. If a customer feels that a gasoline station is charging a price that is excessive when contrasted to comparable sites, he or she should contact the relevant trading standards agency and provide them with the contact details.

So what can drivers do to save money on gasoline?
The way you drive and the way you maintain your vehicle can help reduce your fuel consumption and save you money. Here are some tips:
1. Drive smoothly, avoiding heavy acceleration or braking.
2. Manual cars -- change up to a higher gear as early as possible as you accelerate.
3. Automatic cars -- shift up gears more quickly if you ease back on the accelerator once the car gathers momentum.
4. Keep your engine well tuned, check your oil and fix any problems immediately.
5. Make sure your tires are at the correct pressure and not under- or over-inflated.
6. Keep your trunk/boot or back seat clear of unnecessary items that add weight.
7. If you are not using your roof rack or roof box, take it off.
8. Keep your windows closed, especially if you are driving at higher speeds.
9. Always use the recommended grade of oil in your engine.
10. Use cruise control on major roads and in free-flowing traffic.
11. Turn off your engine in heavy traffic to avoid excessive idling.

Where can I find out more about gasoline pricing?
You can find out more about gasoline pricing in your country or region by visiting your Shell country Internet site or by contacting your local Shell Communications advisor.