Roaring trades: oil majors’ secret success story
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Why are oil majors’ trading desks suddenly so profitable?
The Economist.
Hello and welcome to the Intelligence from The Economist. I'm Jason Palmer. Today on the show, America's capricious grip on frontier AI models and the changing business of concert tours.
First up though.
The world's largest energy firms, collectively known as the majors. They've done really well through this oil shock. And one reason is that they've drilled oil and they've refined it. And they sold it at a higher price, which is not surprising to most people. But another reason is far less known, which is that they've done a lot of trading. A two Favas is our commodities editor. And the Iran war has really shown the extent to which this activity trading has become central to these businesses. Let's start with what you mean when you say trading. So trading can be defined in opposition to marketing. So marketing is selling what you produce, distributing it to the global market. Trading is buying someone else's produce and selling it to whoever wants it most at the highest price possible, at a profit.
And whereas when you sell your own products, what matters is a level of the price at which you sell. When you trade, what matters is the spread. Difference between the price at which you buy and the difference in price at which you sell. And this spread is typically higher when the market is quite chaotic. So if there is a war somewhere, there's a supply shock, then in certain places there will be shortages, there will be also a rush for getting the product now instead of later. And so you'll have all these differences in price that traders can seek to benefit from. And so over time. The majors have learned to do that really well, especially the Europeans. So which companies are we talking about then?
Companies like BP and Shell, which are mostly British. Total energy, also known as total, which is French. Ah, total, no. Like total. And they trade by our estimate forty to fifty million barrels per day of oil and gas. Relative to it's five to ten times more than what they produce. So it's huge. It just shows how central trading is to these businesses. At this moment or in general?
How do European majors like BP, Shell and Total make money from oil trading?
In general. Yeah, in general. And probably during this very volatile period there's been more because they've shifted more barrels. It's a very, very lucrative activity. The majors don't publish data for their trading desks on profitability or anything else really. It's very secretive. But the estimates we've got from a number of sources suggest that these trio, BP Shell and Total, this year could earn in between fifteen to twenty billion dollars in profit, which might be one fifth of the profits. And this might add up to a third to their return on capital. So Something that shareholders will like a lot. Trading profits alone explain why the Europeans have outperformed the American majors uh so far this year, since the crisis in particular, since February.
Why should that be? Why aren't the American majors just as good at this secretive game? It's largely a product of history and geology. So the American majors, they've always had access to vast resources in the ground. They have a lot of oil and gas. They also have a vast domestic market that they can sell to. So they can take advantage of both. The Europeans they don't have that, neither of these things. So what they've had to do pretty much since the formation is to go abroad and produce the barrels there and then distribute it to the global market, which worked Fine until the nineteen seventies when there was a wave of nationalizations. In the Gulf, in the Middle East, and they lost access to the soil.
So they had to go abroad and and buy bells from somewhere else. So BP did it first. essentially discovered that it could buy the barrels it didn't need and and resell them at a profit in the nineteen eighties. And then in the nineteen nineties, Shell and Total did it then because oil prices were pretty low. They needed to boost their returns and they thought that was a way maybe to diversify. So that's a lot of the history
of this trading arm for the majors, but you say that they're really good at it.
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Chapters
8 chapters
1
Why are oil majors’ trading desks suddenly so profitable?
0:03–2:36
2
How do European majors like BP, Shell and Total make money from oil trading?
2:36–4:54
3
What gives European traders an edge over their American counterparts?
4:54–7:00
4
Why is the U.S. government’s AI regulation plan considered a mess?
7:00–9:09
5
How are frontier AI models like Anthropic’s Mythos being restricted?
9:09–12:20
6
What are the economic risks of the U.S. slowing AI model releases?
12:20–15:13
7
Why are major music tours shifting to fewer, longer‑stay venues?
15:13–19:13
8
How will the new concert‑tour model affect fans and local economies?
19:13–22:49