For all its huge wealth, it is clear that the oil industry still needs to learn a thing or two about running businesses. The results released yesterday by Shell presented the starkest picture yet of the imbalance that the oil majors have allowed to develop between their upstream and downstream operations.
Like Exxon and Chevron before it, Shell made whacking losses in its downstream business in the final three months of last year, having failed to spot in time that global overcapacity in refining was about to run headfirst into dwindling demand for fuel during a worldwide recession. The result, exaggerated by a rising oil price, was a collapse in refining margins – and those huge downstream shortfalls.
With little prospect of refining margins improving any time soon, Shell has been trying to reduce its downstream exposure as quickly as it can, but it has been too slow. Of the majors, only BP was nimble enough, making big disposals as early as 2005, and it was thus the only large oil company to make a downstream profit in the final quarter. Even it, however, will not go on making money with refining margins at below $2 a barrel, as they currently are, despite very significant cost cuts.