Forecasts from the research group Cornwall Insight suggest the average household will see their gas and electricity bills rise from just under £2,000 a year to just under £3,500 in October, with further hikes in the early new year.
Not everyone will be fearful of such astronomical increases. Bernard Looney, who rose through BP’s ranks after joining as a drill engineer in 1991 to become its CEO two years ago, is expected to be in line for an £11.7m pay packet in light of performance-related bonuses.
Even by BP’s standards, such salaries and results are astonishing. Its announcement last Tuesday amounted to the second highest quarterly profits in the firm’s history, and three times the sum it made in the same period in 2021.
The reason for such a pronounced uptick is in large part down to supply and demand issues, with wholesale prices soaring as a result. This time last year, the price of a barrel of Brent crude oil stood at approximately £59. Now, it commands around £77.
In recent months, the price has reached even higher sums, with widespread prices of more than $100 per barrel witnessed in the aftermath of Russia’s invasion of Ukraine. In the same way that war has hit global supply chains spanning the likes of semiconductors, car parts, and grain, so too it has impacted energy supplies in Europe, which remains heavily reliant on Russian gas.
The energy giants are the beneficiaries of this global trend. As well as BP, its competitors are making vast sums of money. Last week, Shell reported record quarterly profits of nearly £10bn between April and June, while Centrica, the owner of British Gas, announced operating profits of £1.3bn, driven largely by its oil and gas drilling division.
But it is not just the oil produced by the firms themselves that is fuelling such profits. The likes of BP and Shell also employ phalanxes of traders tasked with exploiting market volatility and turning a profit on fluctuations in international prices. Around a sixth of BP’s quarterly profits, for example, have been generated via gas trading.
The question shareholders are asking is: how long will the boom last? Such blatant profiteering at the expense of a geopolitical crisis that has displaced at least 12 million people is unpalatable for many, yet it is an unbecoming reality of the global economy.
For its part, BP said it expects oil and gas prices to remain high into the third quarter of the year, citing “ongoing disruption to Russian supply” and “reduced levels of spare capacity. Others, however, are not sure. Analysts from the investment bank, Citigroup, have said the price of a barrel of crude could drop to around £53 by the year’s end.
In the meantime, however, the booming demand for fossil fuels is encouraging the big energy firms to look after their investors. BP, for instance, has confirmed its plans to raise dividends, while buying back nearly £3bn of its own shares over the next three months.
Some believe such largesse could prove to be a high water mark for an industry that is coming under increasing political pressure.
Harry Morgan, a research analyst at Rethink Energy, said: “Rather than investing in their transition, these companies have persisted with increasing payouts to shareholders that remained loyal through a wobbly few years. But this strategy will likely see 2022 as the year that ‘big oil’ topped out for the final time.”
The priorities of BP and other firms like ExxonMobil also give rise to another key issue; it is not just the profits the energy giants are making that is stoking anger, but the way in which they are investing them. There are valid questions over why BP, a company which still derives the vast majority of its profits from oil and gas, has not used such riches to accelerate its push towards clean energy.
Instead, as well as share buyback schemes, significant sums are being pushed towards fossil fuels BP is expected to invest around £7.5bn in oil and gas projects this year - more than half of its global capital expenditure. Indeed, Mr Looney has said it will increase spending on new oil and gas by around £400m in response to the global supply crunch, describing such a strategy as a way in which to “help with energy security in the near term.”
There is good reason for cynics to scoff at Mr Looney’s reasoning. New investments in oil and gas are not a quick fix for the UK’s energy supply. That is especially true of BP’s continuing oil and gas production in the North Sea. In April, the company submitted plans to develop its Murlach field 126 miles north east of Aberdeen, which it expects to generate nearly 26 million barrels of oil. Shell, meanwhile, has given the final greenlight for the Jackdaw gas field, located 155 miles east of Aberdeen, which has reserves of between 120 million and 250 million barrels of oil equivalent.
But given the vast infrastructural work required, such as the drilling of production wells and the installation of flowlines, the first oil from Murlach is not expected to emerge until the second quarter of 2025. Similarly, Shell said its Jackdaw project demonstrated its commitment to providing its customers with “secure and stable supplies of energy”. The small print? It isn’t expected to come online until late 2025.
Are such investments wise in the short term? Mr Morgan believes it may help “prop-up” balance sheets for the next few years, but stressed it would not protect the major firms from an eventual downturn.
“For the next two to three years, the boycott of Russian oil will limit how low oil prices can fall, and big oil will remain profitable,” he added. “Beyond this, their entire existence will depend on how they are investing today.”
Ironically, the UK government’s windfall tax on oil and gas operators is expected to encourage the inward flow of money to oil and gas projects. While the tax rate for the sector will temporarily increase from from 40 per cent to 65 per cent of profits, a new investment allowance rate nearly doubles the tax relief available to North Sea producers, allowing them to enjoy a 91p tax saving for every £1 they invest.
Such incentives may whet the appetite of the big energy firms, but they will do little to improve domestic supplies in the short term or lower the utility bills of struggling families. What is more, they jeopardise the UK’s efforts to combat climate change.
Environmental campaigners warn that the impact of such strategies would be devastating. “This announcement of yet another obscene profit for BP is a clear sign that our energy system is fundamentally broken,” said Freya Aitchison from Friends of the Earth Scotland.
“Rising energy prices are a key driver of the cost of living crisis which is plunging millions of people in the UK into fuel poverty, yet bosses and shareholders at BP are getting even richer by exploiting one of our most basic needs.
“BP is also worsening climate breakdown and extreme weather by continuing to invest and lock us into new oil and gas projects for decades to come.”
As the rich get richer, the Back Of England has announced the UK is to fall into its longest recession since the 2008 financial crisis.
The bank made the grim prediction after it raised interest rates from 1.25 per cent to 1.75 per cent – the biggest single hike for 27 years.
Meanwhile, regulator Ofgem is expected to push up the cap on household energy bills to around £3,450 in October.
Scotland’s anti-poverty network, Poverty Alliance, has called on politicians and governments to do more to avoid “financial disaster” for many families.
Peter Kelly, director of the Poverty Alliance, said: “Compassion and justice demand that politicians urgently rebalance our economy and renew our social security system to help people avoid the man-made disaster that is affecting too many of us.
“The windfall tax on energy corporations can be built upon, and the UK Government can use the money to provide more emergency support to people who desperately need it.
“We can bring in social tariffs for energy, so that people aren’t pulled into fuel poverty by rocketing bills.
“And we can redesign our economy to boost wages, and increase the support we give to each other through our welfare system and public services. Tackling poverty and low incomes is achievable – all it takes is political will.”