The Energy Crisis

[mumbles87]

Yes it does. But the consumer doesn’t feel that directly.

Agreed we don't feel it directly but even this level is a lot (20p rise on prices since 2020 electric) so when you see those profits

I mean how much money is too much money?

Starts to get ridiculous

[EvilC]

Agreed we don't feel it directly but even this level is a lot (20p rise on prices since 2020 electric) so when you see those profits

I mean how much money is too much money?

Starts to get ridiculous

I agree, it is an obscene amount of money IMO.

How much is too much is subjective. It’s hard to say it wasn’t too much a long time ago, but then they’d argue losing twenty billion during COVID was too much of a loss and nobody shed a tear then. The other thing is - what are you going to do about it, because political actions in commodity markets are so often subject to the law of unintended consequences that what you think sounds good is often really quite bad.

[mumbles87]

I agree, it is an obscene amount of money IMO.

How much is too much is subjective. It’s hard to say it wasn’t too much a long time ago, but then they’d argue losing twenty billion during COVID was too much of a loss and nobody shed a tear then. The other thing is - what are you going to do about it, because political actions in commodity markets are so often subject to the law of unintended consequences that what you think sounds good is often really quite bad.

Profits wouldn't be that bad if they didn't get such ridiculous subsidies when renewables get hit

The system seems to favour big oil

[EvilC]

I've made no secret of the fact that I'm but a simple lad so can someone explain the huge fuel company profits. Yes, I know there's a global shortage/ crisis and that drives prices up, however, if 'they've' all made huge record profits that suggests to me, at least, that the increased prices we the consumer have been asked to pay, are perhaps disproportionate to what was required to maintain the balance we had.

Since this crisis is a result basically of issues with and a shortage of gas, I will talk about the gas market alone.

Apart from things that make up a relatively small part of the cost, such as the cost of LNG boat hire (which is ****ing expensive), or the cost of flowing gas across interconnectors, the cost of production is broadly fixed - so producers are what is called operationally geared, where a significant part of revenues above their fixed cost base all convert to profit.

The other thing to note is that it is a commodity. Whilst this isn’t always absolutely true, think of commodities as homogeneous, so one therm of gas is much like another. Commodities generally price off the marginal unit - which means that producers produce until they can’t cover their variable costs, then they don’t produce, which balances supply and demand (not sure I’m explaining that well, if not please say so).

Europe has had a very significant supply cut from Russia. Replacing those supplies in the short term is not possible due to the infrastructure required. It also ended last winter with very low storage levels.

Gas is obviously vital - we use it to heat our homes, generate our electricity and power our industry. So it is hard to massively slash demand without severe consequences. That said, users have responded to price and reduced demand quite well IMO, which has helped contribute to wholesale price falls, which we should see in our bills later in the year.

During the summer pre-Ukraine, so when people hadn’t thought about Russian supply cuts or any of that stuff and prices were starting to move significantly, a very experienced, very knowledgeable and incredibly bright individual - a legitimate expert in European power and gas, someone who I respect a lot - said “there is no gas anywhere and the price could go to the moon here”.

If you cannot change the level of supply then you need to change the level of demand. And one way of changing the level of demand is the price. If your bill had gone up by 15% then you wouldn’t be pleased but you’d probably use energy in the same way you did before. This does nothing to resolve the supply and demand imbalance.

Sadly, price is probably the best mechanism for addressing this imbalance. Energy and commodities are subject to (often violent) short term demand movements that require significant investments over numbers of years to counter (when supply drops or demand increases).

There are other things you can do. You can tax, but you cannot tax imported gas as it either won’t get imported or will be passed on to the consumer. You also potentially deter investment.

You also need to look past the headline numbers a little - because BP is based in the UK, it is a global company that generates most revenues abroad. Is is worth noting that, for example, the Shell share price is broadly where it was pre-COVID. BP’s is lower.

So tax them if you wish, but there may be consequences for future investment, which is what is going to eventually help to resolve this (I hope).

I’m not about to try and address whether these profits are too much or too little. That’s up to the individual. I’m just trying to explain what the issue is.

[mumbles87]

Why everything you say makes sense the second to last paragraph shows everything wrong with the system

"If you tax us we might withdraw investment"

Basically a constant threat to keep their tax bill down

[Hummer_I_mean_Hammer]

^^^ surely same for any business? If you're paying a large(r) tax bill, then you will not have the money to invest in new equipment, hires, or training staff?

Taking it down to a small one man local effort - you might want to take on someone as a trainee, but if your profits are being taxed heavily, then you won't be able to.

[EvilC]

Why everything you say makes sense the second to last paragraph shows everything wrong with the system

"If you tax us we might withdraw investment"

Basically a constant threat to keep their tax bill down

So tax them. Like I said yesterday, law of unintended consequences.

[SammyLeeWasOffside]

I guess the proof will be in the pudding. If these profits equal increased investment in renewables and protecting supply in future then (in a way) we all will benefit.

[EvilC]

I guess the proof will be in the pudding. If these profits equal increased investment in renewables and protecting supply in future then (in a way) we all will benefit.

You’ll get investment in renewables if projects make financial sense and if you are able fix these returns to ensure you capture them (which is much harder to do now since the banks were basically regulated out of the market).

The threat of taxes being higher than anticipated means that it is part of your return that is potentially under threat.

[Friend or Foé]

Since this crisis is a result basically of issues with and a shortage of gas, I will talk about the gas market alone.

Thankyou, that was well explained.
Nobody enjoys seeing disproportionate profits for an organisation that is supplying a vital commodity, yet over taxing them will do not much here in the UK to recoup anything.
I suppose it’s a little bit like trussenomics. If the market doesn’t like how a government is reacting, market will turn its nose up at them.
This is going back a while, but why on earth didn’t the UK create sovereign wealth fund that was linked to north sea exports like the Norwegians have since the early 80’s when they started large scale licensing in the north sea.
With their resource, they’ve managed to create a domestic energy sector that isn’t reliant on gas, yet exports the vast amount that it possesses to create an enormous wealth fund that makes is worth a staggering amount. I know we aren’t exactly like for like as the UK population is about 5 x that of Norway so instant demand for domestic gas wasn’t as high. But it feels like the UK pretty much spunked any profit it could make from the north sea.

[EvilC]

You'd need someone that was around/sentient at the time of the gas fields being sold off to answer that, I don't have the knowledge.

[bubbles1966]

This is going back a while, but why on earth didn’t the UK create sovereign wealth fund that was linked to north sea exports like the Norwegians have since the early 80’s when they started large scale licensing in the north sea.
With their resource, they’ve managed to create a domestic energy sector that isn’t reliant on gas, yet exports the vast amount that it possesses to create an enormous wealth fund that makes is worth a staggering amount. I know we aren’t exactly like for like as the UK population is about 5 x that of Norway so instant demand for domestic gas wasn’t as high. But it feels like the UK pretty much spunked any profit it could make from the north sea.

The UK's population is something like 13x the size of Norway's, so in reality we have only ever had a fraction of the revenue per capita, and the UK was so indebted in the mid 1970s that it needed an IMF bailout. If memory serves, Norway has put roughly £30bn pa aside in surplus revenues since the early 1990s. We could put £30bn aside into an investment vehicle but it would be at the expense of services, welfare, jobs etc. They have a huge international trade surplus so find the money easy to forego. We seem to have totally abandoned the idea that we should trade profitably, or at least in balance, since 1997.

The minute the 'fund' made some ropey investments - as the Norwegian one has - all hell would break loose over here. "Banksters", "Profiteers" "Casino" ..... the script writes itself.

Imagine saying,'we're putting the money into a fund' and someone starts talking about free school dinners, nurses' wages etc.

A large chunk of our electorate simply don't have the mentality of doing without for the long term good.

[SammyLeeWasOffside]

You’ll get investment in renewables if projects make financial sense and if you are able fix these returns to ensure you capture them (which is much harder to do now since the banks were basically regulated out of the market).

The threat of taxes being higher than anticipated means that it is part of your return that is potentially under threat.

In terms of financial sense how long term would oil companies be thinking. At some point we will need an alternative fuel regardless of the environment, they will need something else to sell. So long term it makes financial sense surely to use some of the excess now. It's always cheaper to pay now so they say lol.

[EvilC]

In terms of financial sense how long term would oil companies be thinking. At some point we will need an alternative fuel regardless of the environment, they will need something else to sell. So long term it makes financial sense surely to use some of the excess now. It's always cheaper to pay now so they say lol.

For renewables they are typically project financed (it is different for a utility or oil major that have deeper pockets) - so you forecast your cost, you try and find someone to give you a 10 year offtake at a fixed price, you estimate how much you will produce, stuff it with as much debt as you can get away with, fix your interest rate and after all your costs there should be profit left.

For a gas field I know a lot less - you are essentially taking a longer term view on the gas market (which is what your company shares are - a bet on hydrocarbons) - it is about competition for capital around your company and where the perceived return is best.

[delbert]

So tax them. Like I said yesterday, law of unintended consequences.

Liz Truss knows all about that, in fact, thanks to her, so do we......

[bubbles1966]

The National Audit Office are now claiming that the government is going to have £70bn more in it's pocket in the coming year than all the autumn prophesies on the energy bill. As forecasting predictions and mistakes go, that is a doozie.

[chelmsfordhammer91]

In terms of financial sense how long term would oil companies be thinking. At some point we will need an alternative fuel regardless of the environment, they will need something else to sell. So long term it makes financial sense surely to use some of the excess now. It's always cheaper to pay now so they say lol.

I know it's not the same sector but we have similar issues in the financial industry where change now can be a real benefit to our client firms (financially) a decade or so down the line.

However, depending on that firm's CEO, even if the chances of long term gain were extremely high or a near certainty, if they are only going to be in the job for another 5 years or so they won't bother as the immediate hit to the balance sheet taints their reputation.

Not too dissimilar to governments that only look ahead a couple of years tops, if that.

Great post btw Evil, makes a lot more sense to me now. I had enough trouble explaining to my FIL how Shell don't set the price for the product they are selling and that the profits are globally etc.

[YorksHammer]

The National Audit Office are now claiming that the government is going to have £70bn more in it's pocket in the coming year than all the autumn prophesies on the energy bill. As forecasting predictions and mistakes go, that is a doozie.

So it shouldn't struggle to afford, say, a payrise for nurses and other public sector workers worth about £13bn?

Cool.

I'd rather a conservative forecast was made than an overly positive one that led to issues down the line. It's a volatile energy market and, realistically, a lot of steps have been taken since those Autumn announcements, coupled with a milder winter, that have probably helped more than was anticipated.

[EvilC]

The National Audit Office are now claiming that the government is going to have £70bn more in it's pocket in the coming year than all the autumn prophesies on the energy bill. As forecasting predictions and mistakes go, that is a doozie.

Unfortunately the lack of crystal ball on the weather in such a wild gas market means that these things are going to happen. And where the market will be next winter is anyone's guess.

[bubbles1966]

So it shouldn't struggle to afford, say, a payrise for nurses and other public sector workers worth about £13bn?

The £70bn will go on deficit/future debt reduction.

They still don't have enough money to cover current running costs. It just means they need to make fewer cuts and tax rises.