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Oil majors: Total January 10, 2009

Posted by mytruthaboutoil in Oil (general), Oil giants, Oil prices.
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In less than a month, the French oil Major TOTAL, will announce its yearly benefits. As usual, a huge debate will arise in France about Majors’ benefits. Let’s get beyond the sterile scandals and try to understand how Total really makes its money.
The company benefits should be quite good for 2008. For the nine first months of the year, we know that the company made 11 billion Euros of benefits.
Of course Total benefited from the early 2008 oil price burst, when the barrel was sold for an average 110-115 dollars (54% more expensive than in 2007).
I don’t have yet any figures for the period running from October to December, but I am ready to bet that the company will still be doing pretty good despite the fall of oil prices (the barrel fell down to 35 dollars).
Let’s summarize: when the prices are up, TOTAL is doing fine and when the prices get down, TOTAL is still doing fine as well. How come?
TOTAL, as well as most of the major oil companies worldwide, is actually involved in two main business sectors and do not only depend on oil prices: they are both oil producers and oil refiners.
So, as an oil producer, TOTAL made historical benefits during the first part of the year with a barrel costing up to 150 dollars. The benefits growth rate reached an unbelievable 39%.
In July, prices started to get down and therefore the oil producing business of TOTAL has suffered.
TOTAL managed to generate alternative benefits thanks to refinery. The oil refining business is totally controlled by less than a dozen major oil companies, including TOTAL.
These majors limit as much as possible the development of new refining facilities in order to control the market and to be able to generate refined oil shortages when necessary in order for them to raise their own benefits.
Actually this year, Majors have also been helped by the weather. The hurricane season in Florida and in the Gulf of Mexico has been very strong and has partially destroyed many refining facilities in this region (where are located some of the biggest in the world).
TOTAL along with other Major has organised a shortage in refined oil and have therefore been able to sell their oil at higher spots, increasing their benefits.

Once all of this is said, people who are not in the oil business have also to keep in mind that the oil sector is very specific and highly competitive. Major oil companies have to permanently finance heavy investments with unpredictable returns. This might explain at least partially, why oil majors do higher benefits than many other businesses.

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