[Falstaff]

...post record profits, up 25%? http://news.yahoo.com/s/ap/20080429/ap_on_bi_ge/earns_netherlands_shell

Please avoid jokes and try to actually give an answer to this question. Thanks.

[Randall Parker, MBA]

Oil is a commodity, but it is one that is in high demand. The bid/buy system for commodities takes into account demand when setting prices.

The problem is that oil is in (artificially?) short supply, and we cannot live without it. Since we seem willing to pay any price (very inelastic demand) for gas, this keeps prices high. Like the article states, this may not be a sustainable price level, but most companies work on a cost-plus system of price setting at retail.

Shell made its money from pulling oil out of the ground and selling it. The cost of extraction has not really increased, but the demand for the product has increased, driving up prices. Higher prices coupled with static costs results in higher gross profits; hence, Shell's 25% increase in profits.

The main price competition is on the retail side of gas prices, not on the wholesale/manufacturing side, as the pricing is set by the commodities markets.

Pump carefully!