20051026-fuel-prices

26/10/2005

News

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An interview with Jean-Paul Vettier – President, Refining-Marketing, Total (October 26, 2005)

1. As President of Refining-Marketing, what is your message about fuel prices?

Our customers are unhappy about the increasing cost of fuel and they are cutting back on their consumption. How could an oil company like Total be happy with this situation? You'd have to be masochistic to find it acceptable. So amidst all the wild rumors about fuel prices, I'd like to say a few simple things to set the record straight.

In the face of mounting oil prices, the French government recently demanded that oil companies lower their prices at the pump. How much leeway to oil companies really have to cushion the price hike?

It's quite simple; the room for manoeuvre is practically zero!

To start with, the increase in oil prices is an international phenomenon driven by booming demand in Asia, especially China and India, and made worse by the aftermath of Hurricanes Katrina and Rita, which took out more than 15% of total American refining capacity.

Secondly, France is the market with pretax prices among the lowest and margins long recognized as the weakest in Europe. An oil company has an average operating margin of around one euro cent per litre of motor fuel! And it's now widely understood that in Europe, the French state levies the highest fuel taxes (a position recently shared with the United Kingdom). So, if you want to talk about lowering fuel prices, you know where to look.

Thirdly, in France as elsewhere, fuel prices are established on the basis of international market prices, which reflect global supply and demand. When there's a surge in international prices, no French distributor can generate good results because market competition prevents him from fully passing on the increases to the consumer. What's more, companies also have pipeline, storage, trucking and other supply chain costs to cover. And finally, pump prices are influenced by competition among distributors in a given area.

To gauge the effect of the government's request to lower prices, I'd like to add that Total generates only 5% of its earnings in France, from its combined oil and chemical operations.

2. What has Total done to deal with Europe's diesel deficit and the United States' unending demand for oil products?

For more than 10 years, Total has been warning politicians that very rapid production of diesel engines is leading us down a dead end. And the problem isn't going to be resolved quickly, because the real growth in the use of diesel engines wouldn't have been possible and would still be difficult had there not been tax incentives.

The deficit of diesel fuel is in fact a European phenomenon that is now spreading to the United States. so now we have both regions competing to import diesel fuel.

We cannot equip all our refineries with diesel production units, either due to limited capacity or inexistent or insufficient feedstocks to produce diesel. In spite of some €3 billion in investments (either planned or in the works), Total will merely keep up with the increase in demand from 2005 and 2010. It may even be worse when new specifications (10 mg sulfur per kilo) take effect in January 2009. Just like the proverbial French butcher who turns every last morsel of his pig into something useful, a refiner must utilize every product he extracts from a barrel of crude. If everybody wants only the best cuts—ham or diesel depending on the case—their price will necessarily go up.

For all these reasons, it's pretty easy to predict that barring a major economic upheaval in Asia, fuel prices will remain high over the next five years due to strong demand, insufficient refining capacity in the United States and the limited ability of European refineries to supply the demand for diesel. On this last point, contrary to what the United States has said and to what you may hear or read, Europe has sufficient refining capacity. However, the lack of balance between supply and demand for gasoline, diesel/jet and heavy fuel oil has led to the afore-mentioned problems of adaptation.

3. The French government is putting pressure on oil companies to develop biofuels. What is Total's policy about the production of these new fuels?

Whatever you may have heard to the contrary, during the next 40 or 50 years hydrocarbons of fossil origin will continue to be the most efficient energy source and by far the least expensive.

It's a good idea to promote the development of biofuels alongside fossil hydrocarbons, but if they're to become a viable option, the government must accept that they can't be taxed like fossil fuels. They will only be competitive if they're tax exempt.

Given Europe's considerable gasoline surplus and equally large diesel deficit, it makes sense to encourage the development of biodiesels over ethanol, which is a gasoline additive.

Looking toward the longer term, Total is undertaking a lot of research into alternative fuels (fuels produced from natural gas, biomass or compressed natural gas) and future propulsion systems (continued improvement of the internal combustion engine and fuel and hydrogen cells). These programs will be stepped up in the years ahead. You can be sure of that!

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