Soaring oil - the good and the bad

HIGH oil prices are good news for shares in giant energy firms. Diesel is costlier than petrol because it costs more to refine. And the Treasury is coining it in from the North Sea tax gusher.

True? Not really. Take the first point. As the cost of a barrel of crude heads ever higher - Brent crude ended the week at $50.77 - there is a widespread notion that the price of oil company shares should benefit.

'It is remarkable, given that these guys are raking in the cash,' said Mark Redway, energy analyst at broker Cannacord Capital, 'but there is no relationship between shares in BP and Shell and the price of oil. We have done a big study of this and there is no correlation.'

He added: 'These companies are so big that their shares are no longer an arm's length way of investing in oil prices. They are an arm's length way of investing in the stock market itself.

'BP, for example, accounts for 10% of the FTSE 100 index. So when investors switch into shares, BP does well. When they switch out, it does badly.'

With the price of diesel ending last week at an average 390p a gallon, against 380p for petrol, puzzled drivers who switched to this allegedly greener - and supposedly cheaper - fuel were searching for explanations.

'In general, diesel costs no more to refine than petrol,' said Ray Holloway of the Petrol Retailers' Association. 'But a surge in sales of diesel vehicles has worsened the bottlenecks in supply, pushing up the price.

'This is not helped by the fact that our refineries are still geared up to produce petrol.'

Holloway said the diesel price was also affected by changes here and on the Continent to the specification of the fuel itself. Such changes always created some supply problems, he said.

What about Gordon Brown's bonanza, as UK oil companies hand over big chunks of their new-found wealth in the form of corporation tax, petroleum revenue tax and North Sea royalties, and motorists chip in extra VAT on fuel?

According to the Item forecasting group, which uses the Treasury's own economic model, every $10 rise in the price of a barrel of oil, if sustained for a year, would bring in £2bn extra in tax.

But about £750m of this is wiped out by lower corporation tax payments from non-energy companies whose profits are depressed by the burden of extra oil costs.

The average rise in the North Sea price in the year to Friday was $7.03 a barrel, netting Brown about £850m.

A lot of money. But it amounts to only 0.17% of this year's public spending.