I originally posted this as a Twitter thread to explain how energy prices have not gone up because of a shortage of oil and gas or rising costs of extraction, but because of market speculation.
Making sense of energy price rises is important. They’re going to be the cause of a lot of poverty in the UK. So, I’ve been doing some analysis. What follows is a bit simplified, but not too much. What it reveals is that you’re about to be ripped off, massively.
In January 2020 SSE, a multinational energy company, suggested that the cost of the energy they supplied was broken down as follows:
Let’s take that SSE data as a reliable benchmark for what’s happened to date. And let’s assume that all the data that I can find that says that the average house paid £1,200 a year for fuel in 2021 is also right. It was pretty much for me, for example.
Now let’s base what energy costs might be on the fixed prices now being made available by the same energy suppliers who were happy to supply our electricity and gas for £1,200 last year. It seems around £3,000 is that new normal. Again, it happens to be for me.
So, the price is increasing by £1,800. But the cost of some things has not changed. For example, the costs of delivery, billing and customer services have not changed, certainly by much. Nor should government and environmental schemes cost more.
To be clear, delivery cost £288 on average in 2021, and I am assuming it still does. Billing and customer service cost £240, and still should. And green and other levies cost £156, and I see no reason why they should change. That’s £684 of cost that should not change, at all.
The government is still taking 5% in VAT. That was (and this is near enough) £60. Now it’s £150. Why you need to be penalised with £90 of extra tax for energy costs going up is for the government to justify. It’s a decision they seem happy with. Take it up with them.
So, of the new £3,000 cost we’ve explained £684 of fixed costs and £150 is VAT. That leaves £2,266 to cover the cost of buying in the energy sold to you and profit.
In 2021 the cost of bought-in energy was 36%. That was £432. I’ve checked the accounts of a UK based energy company. I used SSE again, because that seemed fair. They made a normal profit margin of 11.6% in 2020 and 13.3% in 2021, or about 12% on average.
SSE both makes and distributes energy. Now, this is a little simplistic, but let’s assume they make 2% on distributing energy to us and so made 10% on making energy. The profit on energy distribution was £24. That on the bought-in energy was, then, roughly £43.
So now we can work out that the cost of producing the energy that was sold to you in the last year was the bought-in cost to the distribution company of £432 less £43 (near enough) of profit the producer made, or about £389 of real cost of production for the year.
Now let’s assume the profit margin on distributing energy remains at 2%. With the average cost of domestic energy increasing from £1,200 to £3,000 that puts the distribution profit per customer up to £60. That’s two and a half times what it was before. That’s a big jump.
And let’s be clear, that none of the cost of producing energy in the world has changed because of war in Ukraine. In fact, right now, there is not even a shortage of energy in the world because of that war: Russia is still supplying oil and gas right now.
So, the only reason for price increases is because oil and gas dealers expect a shortage in oil and gas which has not happened as yet. Bluntly, what we’re seeing is panic buying of oil and gas that’s still in the ground right now by countries terrified that they might run out.
It’s vital to remember this: oil and gas are going up in price because people – oil companies, hedge funds and others – are speculating in oil and gas in the expectation that there will be shortages. No one actually thinks the stuff is going to cost more to produce.
So, let’s summarise where we are in this table:
Please accept that some of these numbers will be give and take a bit, but probably not that much. I think my assumptions are pretty fair.
Then notice that the first three lines in this table have not changed. These costs are near enough fixed. Meanwhile, the government is going to take £90 a year more off you whilst the distribution company is going to make £36 extra profit a year out of you.
And then note that the electricity and gas suppliers to the distribution companies are going to see their profits increase almost exactly forty times, from £43 a year to an extraordinary £1,717 a year.
That’s where your extra payment is going. It does not disappear into a black hole. It goes to oil and gas companies, power generators, the countries and shareholders that own these, and of course to the speculators who are currently making billions out of this.
To put this in context, it’s estimated that the price of UK energy is going to increase by £38 billion. That increase will be split between the government (£1.9 billion), the energy distribution companies (£760 million) and oil, and generation companies (£35.34 billion).
In plain straightforward terms that is profiteering – or exploitation if you like – on a quite staggering scale. Brexit is the excuse for some. Covid was the excuse for more. And now the war in Ukraine is being used as an excuse for the biggest rip-off of all time.
Four questions then.
Why is our government accepting this?
Why are governments elsewhere accepting this?
Why aren’t they cooperating to stop it, individually or together?
They could. They aren’t. So, what is going on here?
I look forward to answers from ministers and justifications from oil companies. And in case I have anything wrong, I look for clarifications. But the explanation I seek is why is war being permitted as an excuse for a massive rip-off of ordinary people by big oil companies?