Why the energy price cap is going up when oil firms are making billions in profit

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·Business Reporter, Yahoo Finance UK
·6-min read
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Energy price cap: Britain's Chancellor of the Exchequer Rishi Sunak leaves after hosting a press conference in the Downing Street Briefing Room on February 3, 2022. - The UK government on Thursday stepped in to help the hardest-hit households struggling with the rising cost of living, announcing a £9 billion package to offset soaring energy bills. It followed an announcement by that energy regulator that the price cap on how much suppliers can charge consumers will jump by 54 percent due to soaring wholesale gas prices. (Photo by JUSTIN TALLIS / various sources / AFP) (Photo by JUSTIN TALLIS/AFP via Getty Images)
Energy companies are reaping the benefits as consumers face higher bills thanks to the rising energy price cap. Photo: AFP via Getty Images

Tens of millions of UK households will see their energy bills rise by an average of £693 ($940) a year in April, while big oil and gas firms continue to rake in billions in profit.

The contrast between the squeeze on British families and bumper earnings for some of the biggest global companies has seen critics questioning why more cannot be done to bring down energy supply and fuel costs.

On Thursday, energy regulator Ofgem announced a 54% increase in the UK energy price cap due to soaring oil and gas prices, raising concerns for people who are already struggling to make ends meet.

Those on default tariffs paying by direct debit will see an increase from £1,277 to £1,971 per year on average, while households who use prepay meters will see an increase of £708 from £1,309 to £2,017.

The move will affect 22 million households that are on a default ‘standard variable’ tariff.

The new level, which comes into force on 1 April and lasts for six months, is the highest since the cap on energy bills was introduced in 2019. It also exceeds average bills going back to 2009, according to official data on domestic electricity and gas costs.

As consumers face a cost of living squeeze, thanks to the unprecedented increase in global gas prices, higher shop prices, an increase in national insurance, and rising interest rates, energy companies are reaping the benefits.

Read more: UK energy price cap to rise 54% to £1,971

Separately on Thursday, Shell (SHEL.L) revealed that its adjusted net profit climbed to $6.4bn in the final quarter of last year, up from just $393m the previous year, and $4.13bn in the three months to September. This beat average analyst estimates of $5.2bn.

Annual profits came in at $17bn for 2021, swinging into the black from a loss of almost $20bn in 2020 when energy prices slumped during the pandemic.

Surging oil and gas prices has meant the company has been selling gas for more than double the price it was receiving six months ago, with its upstream unit making sales at $8.88 per thousand cubic feet compared to $4.31.

The bumper results was likewise echoed among US rivals such as ExxonMobil (XOM) and Chevron (CVX), who reported net profits in 2021 of $23bn and $15.6bn respectively, the highest since 2014 when crude last traded above $100 a barrel.

On Friday, Brent crude prices were more than $92 a barrel, a rise of 1.3% on the day, further pulling up oil majors. The climb meant that Brent was at its highest level in more than seven years, since October 2014.

Oil prices were trading more than $92 on Friday. Chart: Yahoo Finance
Oil prices were trading more than $92 on Friday. Chart: Yahoo Finance

As oil prices head for their seventh weekly gain, West Texas Intermediate (WTI) also hit a fresh seven-year high as it neared $91 a barrel. It is on track for a jump of more than 4% this week.

The huge swing in profits for oil majors has meant that some have questioned whether these companies should be hit with a windfall tax, including criticism from Dale Vince, the founder of green energy supplier Ecotricity.

He took to Twitter to ask why the government was not considering the windfall tax on runaway North Sea profits.

Ed Miliband, shadow secretary of state for climate and net zero, said: "With oil and gas profits booming in recent months because of the spike in energy prices, it is clearer than ever that the North Sea oil and gas producers who have made a fortune recently should be asked to contribute.

"Our plan, part paid for with a one-off windfall tax on North Sea oil and gas profits, would save most households £200 off their bills, with targeted support of up to £400 on top of that to the squeezed middle, pensioners and the lowest earners."

However, Shell chief executive Ben van Beurden, said on Thursday: “I’m not convinced that windfall taxes, popular though they seem, will help us with supply, nor is it going to help us with demand.

“If indeed there would be disruptions, possibly due to sanctions or otherwise, of course we will step in and do whatever we can to give Europe supply.”

Last month, a spokesperson for Shell said the company had “stepped in to help customers of energy companies which have recently folded”.

They added: "We’re working with the government and others on how to support customers facing rising energy bills and make the UK market sustainable in the long term for consumers and industry."

Read more: Shell ups share repurchases and dividend as earnings surge

Shell owns supplier Shell Energy, which made losses of £84m in 2020 and £27m the year before. It has since taken on customers from collapsed suppliers First Utility and Green.

It also has more than 1,000 petrol stations across the UK, however, half of them are owned by independent dealers who can set their own pricing.

“It will nauseate millions of drivers, fleeced at the pumps by the current unscrupulous fuel supply chains, to see Shell rub even more fiscal salt into consumers’ skyrocketing cost of living wounds,” Howard Cox, founder of FairFuelUK, said.

“The foul stench of corporate greed hovers over hard-pressed motorists being treated relentlessly as easy cash cows from both political and profit-making concerns.”

After facing pressure to do more, the UK government announced new measures to protect households. The "vast majority" will receive £350 towards energy bills to “take the sting out of the price increase”.

Chancellor Rishi Sunak told MPs he would cut £200 from all energy bills with a further £150 targeted at supposedly more vulnerable households via a council tax rebate for less expensive homes in the bands A-D.

Read more: Energy price cap: Who will be hit hardest?

Households will see the £150 discount on their council tax bill in April and the further rebate of £200 in October off their energy bills.

However the CBI said the work should not stop there, urging ministers to work with energy suppliers to ensure its measures to tackle spiralling costs are "effective".

"Short-term support must go hand-in-hand with a revamped retail energy market, setting a higher bar for market access and tougher stress testing for suppliers," Matthew Fell, CBI chief policy director, said.

Labour MP Nick Smith also questioned: “Does the Chancellor really think that the super profits of 20 billion dollars made by Shell are untouchable? His hands-off approach won’t persuade many people across our country.”

Meanwhile, Labour's Meg Hillier branded Rishi Sunak "the Klarna chancellor" – saying the government's support plan for rising energy bills constitutes a "buy now, pay later" policy.

Watch: Sunak: People to receive £350 of help through energy crisis

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