The Record Profits: Paid by the People

Alexandra Kenney explains some of the reasons for record profits and proposes how we could shake our dependence on costly energy sources

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At a time when oil companies are hitting record-level profits and everyday people are suffering under a cost of living crisis with skyrocketing energy bills, it’s important to understand how we got here.

We need to examine the reason gas and oil prices are so volatile, and the reasons the energy crisis is hitting the UK worse than the rest of Europe. Untangling the complexities of these issues and their interconnectedness can be challenging but necessary to understanding where we might go from here.

Record oil profits

According to recent reports, the oil industry doubled its profits to $219 billion in 2022, ‘smashing previous records in a year of volatile energy prices’. In addition, the 'top Western oil companies paid out a record $110 billion in dividends and share repurchases to investors in 2022,' which has led to renewed pressure on governments to institute windfall taxes across the oil industry. In 2022, companies such as Total and ExxonMobil saw massive profits; Centrica, the UK’s largest energy supplier, tripled its profits to £3.3bn; Shell made $39.9bn (£32.2bn), the highest in its 115-year history; Saudi Aramco profited $42.4bn over a three-month period; and BP hit $27.7bn (£23bn), up from $12.8bn in 2021. These massive profits are directly tied to higher commodity prices of oil and gas sold on the global market.

Falling UK imports from Russia

Whilst the UK's dependence on Russian energy imports is lower than other European countries, the country is still at risk of disruption in global energy markets due to the Russian invasion of Ukraine. In 2021, only 4% of its gas, 9% of its oil, and 27% of its coal were imported from Russia. This fell to £2.2 billion in 2022 and £1.3 billion in the year to January 2023. However, the prices of gas, oil, and energy bills in the UK have still gone up.

Although oil companies have some control over oil supply as they control its exploration, drilling and extraction, the global oil market is highly competitive. Prices are ultimately determined by the complex interplay of factors such as global economic conditions, geopolitical tensions and changes in production levels.

According to API, the Russian invasion of Ukraine has had a significant impact on the global oil market, There was global concern that significant volumes of Russian oil and gas could be affected by physical disruptions, sanctions prohibiting exports, or Russia threatening to withhold it from the global market. These fears over a reduced supply increased global market prices.

The retail price of gas people pay at the pumps includes additional taxes mandated by national and local governments, and refining and distribution costs, all of which become more expensive to import as gas is the main fuel used for transporting the product globally. As an economy grows, the demand for oil increases. When there is uncertainty around the economy or market fears amongst investors, demand for oil decreases.

Furthermore, due to the length of time it takes between resource discovery and acquisitions, there is a cautious approach to investment and capital funding, creating a more limited oil supply. Events like the Russian invasion of Ukraine created ripple reactions across global markets, decreasing the global supply of oil available on the market, and causing price volatility.

How we are paying for oil and gas company profits

With oil and gas prices rising since the invasion of Ukraine in February 2022, energy companies have profited significantly. For instance, BP used its profits to buy back 'an additional £2.5bn of its shares to increase its own company's stock prices and increase shareholder's profits.' However, these profits have exacerbated costs, contributing to inflation that has hit consumers the most, with the rate reaching 10.1% in September. The surging oil and gas prices have also directly increased the cost of household energy bills, thereby contributing to the cost of living crisis. Furthermore, everyday items, goods, and services have also become more expensive due to rising oil/gas prices, which are integral to the global supply chain and are necessary for transportation.

World leaders such as US President Joe Biden have threatened energy companies with higher taxes to increase production, which would help lower the cost of oil and gas under the supply and demand scales. Many European governments have tried to institute windfall taxes on oil and gas company profits to offset the cost of ever-increasing energy bills.

Companies like Shell, BP, and Centrica have announced taxes paid, but some have managed to pay little to nothing in windfall taxes in the UK by accounting for financial losses or spending money on environmentally geared actions such as shutting down North Sea oil rigs. After factoring in the money received back from the UK government every year from 2015 to 2020, Shell and BP ended up paying a negative amount of tax, amounting to -£685m for Shell and -£107m for BP.

"[BP profits are] damning evidence of the failure of the government to levy a proper windfall tax" - Ed Miliband MP, Shadow Climate Change Secretary

Why the UK faces higher costs than Europe

The UK faces 30% higher electricity prices than other European countries. But why are their energy bills so much higher? For one, the UK depends heavily on natural gas for electricity and heating, generating 44% of its electricity from gas-fired power stations, compared to the EU's reliance on gas for only 22% of its electricity with nuclear and renewables comprising the rest. Additionally, a majority of the UK's housing stock, built before 1980, is poorly insulated and energy-hungry, making energy consumption and bills higher.

The UK's much smaller gas storage capacity than Europe’s, up to five days compared to up to 90 days in Germany, leaves the UK more dependent on purchasing gas in short-term markets, resulting in price fluctuations. Finally, even low-cost renewable energy is sold at the same price as expensive gas-powered electricity, as UK electricity prices are determined by the cost of the last unit of energy acquired to meet the country’s electricity demand and balance the grid. This means that the cost of electricity in the UK is closely linked to volatile market prices for gas. Policy changes and market reform are required to lower electricity costs in the long term, according to Professor Paul de Leeuw, director of the energy transition at Robert Gordon University.

Reform calls involve capping household gas and electricity costs, introducing additional windfall taxes, and decoupling electricity prices from gas prices, enabling the UK to price electricity costs closer to the cost of electricity generation, lowering utility bills. The Energy Prices Bill, a landmark bill aimed at addressing energy costs, includes a 'Cost-Plus-Revenue Limit' designed to ensure households do not pay more for electricity from renewable and nuclear energy, thus preventing high gas prices from setting the cost of electricity for cheaper energy sources. The efficacy of these bills in reducing household energy costs remains to be seen.

Did you know? Shell reported profits of $39.9bn (£32.2bn) in 2022, the highest in its 115-year history - BBC

Concluding thoughts

The significance of understanding global market prices for gas and oil and why they are so volatile is that it can better empower people to effectively push for protective legislative policies from their governments. This in turn can reduce the impact of the cost of living crisis so many people are facing across the UK. By understanding what is causing the fluctuations in market prices, we can better address disruptions and points of weaknesses in the supply chain. Thus, it is important to understand the interconnectedness of these issues to find sustainable solutions that reduce the impact of global price fluctuations.

A call to action is needed for individuals and governments to work towards sustainable energy solutions to offset the dependence on volatile oil markets. The article notes that the recent price rises have led to renewed pressure on governments to institute windfall taxes across the oil industry. However, these windfall taxes have been shown to be largely ineffectual as companies find ways to avoid paying a large portion of them.

Provided changes were made to prevent companies from skirting the windfall taxes, such measures could be used to fund sustainable energy initiatives. Meanwhile governments should invest in sustainable energy solutions such as wind and solar power to promote a cleaner, greener future.

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Researched by Alexandra Kenney / Edited by Vanessa Clark / Online Editor: Harry Hetherington

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