So, where does all that oil money go?

It might seem like an easy question. With oil companies posting record profits and Gulf countries buying up assets around the world, it’s easy to see where much of it is going. Still, they will tell you they don’t set the oil price; that is done in the futures markets in New York and London.So I set out to break down where all the money goes.

How difficult it is to extract the oil plays into the cost equation.

It’s very easy to find out who makes money in the United States from a gallon of gas. Those stats are published every month by the Department of Energy. In March, four percent of the price went to those who transport the fuel and another four percent went to marketing; those who sell it on the retail side (it’s often said they only really make a profit from the bad food and cigarettes people buy after filling up). Then eight percent of the price went to those who refine crude oil into fuel.

The government then takes its share (12 percent is tax in the USA compared to tax of 50 percent in France and Germany and more than 60 percent here in the UK). OPEC likes to point out that from 2002-2006 the G-7 countries earned $460bn from tax on oil while OPEC countries earned $410bn from selling oil.

Now, let’s go back to that gallon of gas. The biggest chunk (72 percent) of the price is crude oil. That is where the sticker shock is coming from; $130 plus in the futures market for a barrel of crude.

So, where does that money go? BP spent some considerable time trying to explain this to me. It’s much harder to break it down because it can cost around $1 to get a barrel out of places like Saudi Arabia, while it can cost $70 to extract oil from deep water. With that in mind, BP says in 2007 it earned on average $67.35 for every barrel extracted — it rose to $90.92 for Q1 2008 – and that it cost on average $20.17 to get that 2007 barrel.

The green lobby will of course say they should spend those profits on alternatives to fossil fuels. Others will say big oil must spend more of its profits to find new sources of oil. One survey found that three big oil firms, Shell, BP and Exxon Mobil had a combined $29bn in capital spending during the first quarter of this year. But the three gave $20.7bn back to shareholders.

Mike Watts of Cairn Energy said that his company for one will spend more to find sources of oil because it looks like high prices are here to stay. Cairn is willing to risk the enormous cost of exploring for oil in places that would have been to expensive to contemplate when oil was at $60.

He likes the look of oil in Greenland.

Of course the private oil companies don’t get all the money. No one can drill for oil without striking a deal with the government lucky enough to have black gold. Some contracts include a 50-50 split while other contracts have built-in royalties. What’s interesting here is that the state oil companies in the developing world have learned a great deal from the likes of Shell, BP, Chevron, Total and Eni and are now becoming bigger players themselves.

It’s thought they will start to bid on contracts in places like the Arctic giving the vast amount of money they are earning from the current climate. Look for India and China’s state-owned oil companies to become competitors forcing the private companies to spend even more to get oil contracts.

That could mean even higher oil prices.