Expenses have a habit of rising to match income. BP’s 2007 results show that what is true for households is also true for corporations – even those with sales of $284 billion.
BP could not have hoped for a better trading environment last year with the oil price passing $100 a barrel for the first time and remaining high throughout 2007. Despite this, the company’s expenses have risen so dramatically that its profits actually fell 22 per cent last year.
While individuals usually blow windfall gains on added luxuries, BP has been forced to spend its money correcting mistakes made in earlier years.
Tony Hayward, the chief executive, is restructuring the company’s workforce to take out unnecessary layers of management. BP is doing major repair work on its ageing US refineries after years of cost-cutting, which ultimately led to the Texas City explosion and the deaths of 15 people. BP has also decided to get out of the business of selling fizzy drinks on petrol-station forecourts and has franchised that business in the US.
On the upside, this correction for earlier mistakes is happening during a period of sustained high oil prices, which has mitigated the cost impact on the bottom line. BP’s results would be nothing short of catastrophic if the price of oil was still at 1990s levels.
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On the downside, the pain has not yet ended and Mr Hayward has predicted another $1 billion of exceptional costs this year. It will be some time yet before BP shareholders can enjoy the full fruits of the oil-price bonanza