Written by Gareth Seward
Energy prices are soaring because of greedy corporations. Or so the government, the media and the perpetually morally outraged social media mob would have you believe. It’s a very easy and convenient bandwagon to jump on, as it requires no basic critical thought or economic understanding, and you can simply just be spoon-fed the approved opinion that you’re supposed to have.
However, it’s mostly a load of rubbish. All corporations seek to maximize profits, yes that much is true. In fact, in many instances they’re legally obliged to do so (within the parameters and boundaries of the law, obviously), as it is their duty towards shareholders who have invested their own capital into the business. Investments without which there may well be no business at all. In spite of such profit-driven motives though, the majority of blame for the current “energy crisis” sits largely on the shoulders of government.
The state’s intervention and meddling has, yet again, resulted in market distortions that hurt the consumer the most – and the media are quick to point the finger elsewhere towards that favourite scapegoat called capitalism. “Corporate greed” seems to be the favourite phrase of the moment for the typically uninformed and economically illiterate social media justice brigade, and it is easy to exploit such uninspired banality to help deflect the blame away from their beloved state. Rocketing energy prices are the result of a cocktail of ingredients that have been stirred by the grubby little fingers of the government.
Taxation is an obvious one and an easy place to start for the novice realist. The government’s obsession with “net zero” has seen green taxes and levies on energy companies heavily increase. And you don’t need to be a genius to figure out that the increased cost to a business will get passed on to its customers. Ultimately it is the consumer who will be carrying the burden of all the extra green taxation.
For example, twenty-five per cent of your electricity bill alone is made up of such “green” levies. For every megawatt hour of electricity sold, suppliers are forced to buy Renewable Obligation Certificates (ROCs). This is essentially a tax that is used to force consumers to subsidise renewable energy at a cost of £6.3 billion a year, a significant chunk of which goes towards paying “constraint” payments to wind and solar energy farms to limit their production because they generate “too much”.
These renewable energy plants are also guaranteed a minimum price for the electricity they generate. If the market price dips below this minimum “strike” price, the Low Carbon Contracts Company (a public body) subsidises the difference. Or more accurately, you the consumer subsidise the difference by paying higher energy bills to cover the energy suppliers’ taxes, to cover such subsidies to the renewable energy companies – who are subsequently paid NOT to produce. Nobody said this made any sense…
Add to the mix the Climate Change Levy, the Green Gas Levy, and a bunch of other government “green” schemes, then the average consumer pays almost an extra £200 a year on energy bills, costs that are being passed on from the energy firms. It is also worth noting that North Sea oil production is subject to the highest corporate taxes in the United Kingdom. Again, the tab for that will be picked up by the final link in the chain; the consumer.
Also, energy production is an expensive process. It requires a lot of investment. However, the foolish and short-sighted war on fossil fuels by global governments has seen investment in them diminish. In an industry the government is trying to eradicate from existence, strangely investors are not too keen to risk too much of their money. I mean, who could have ever seen that one coming? Still, less investment means less production, which subsequently means supply becomes scarce. Now, if supplies are low but there is still a demand, you don’t need to read Economics 101 to understand this is going to drive wholesale prices up higher. If wholesale prices are increasing, again the energy suppliers are going to pass that cost on to the consumer.
Let us not forget either that governments around the world had an alarmingly hysterical over-reaction to COVID-19 which resulted in the tyrannical overreach into our lives and businesses. The lockdowns and restrictions imposed by the government also impeded and delayed energy production, making a scarce supply even more scarce. A double whammy by the state – why screw something up just one way when you can do it in two? Other factors that limit supply, as well as market competition, are restrictions on domestic gas production and tariffs on imports. This will put upwards pressure on prices, and who is responsible for these factors? It’s the government again.
Speaking of market competition, let’s look at how that has factored in too. The price caps imposed by the state have led to a loss of competition and investment. From seventy energy companies just a few years ago, we are now down to barely twenty. Due to wholesale energy prices increasing (a result of the aforementioned government meddling) and a cap on prices, many smaller suppliers have struggled and have subsequently gone out of business. Now, what happens in any industry where there is a demand for the product yet little market competition? Prices become less competitive.
So, government green policies, taxes, COVID restrictions and price controls have all heavily contributed to those painful energy prices we are facing right now. The consequences of government intervention have seen supplies, investment and competition diminish and an increase in operating costs all lead to much higher energy bills. Let us acknowledge that, more than just the simpleton “corporate greed” catchphrase. But what else? Oh yes, inflation.
Years of poor fiscal policy, poor monetary policy, artificial credit expansion, suppressed interest rates and an absolutely insane amount of money printing during the COVID era has inflated away the purchasing power of our currency. That means it requires more units of currency to buy stuff because it’s worth less. Higher prices in other words, and the energy markets are also going to be affected by this. You can blame the government for that one too.
“But the energy companies are making record profits!” I hear the echo chambers of social justice cry. Of course, there’s always more context to these things, but they only get in the way of a good Facebook meme, don’t they? But here we don’t trouble ourselves with such things and would rather delve beyond the simplistic phrases and catchy slogans that so often have an absence of any context.
For a start, there’s a difference between profits and profit margins. A profit is simply defined in business when in a quarter you have made more than what you have spent. Even if a profit is recorded, this doesn’t necessarily mean that a company is actually profitable enough to stay in business over the longer term. Simply showing a net profit doesn’t mean you’re earning enough return on expenses to survive. For a better indicator of that you need to calculate the profit margin.
Now a profit margin is calculated into a percentage format, and it tells you the profitability of your company and its general financial viability to stay in business. It is very possible that you could have higher revenue and higher earnings than a smaller company, but the smaller company is more profitable because it gets a higher return on its spending. You can have high profits for example, but a very slim profit margin. So, these record profits the energy companies we keep hearing about do not necessarily translate into higher profit margins.
In fact, after sustaining heavy financial losses because the economy was shut down for well over a year and supply costs and overheads became so volatile, I would venture a guess that they are operating at a much tighter profit margin than they were prior to the crisis. This means that they are incurring more costs per unit of revenue, thus having a narrower profit margin. They are making less relative to costs than what they were previously. Also, the energy companies have absorbed the customers of those firms put out of business by the government, which will obviously increase revenue and profits, making those simplistic figures of “record profits” look even more substantial on the surface.
Those firms that have managed to stay in business have no incentive to cut prices, but on the contrary to go in the other direction. Government has seen many of their competitors go out of business, made it difficult to attract investment, hugely increased the cost of doing business, are imposing ever increasing taxes and levies, inflation is soaring, interest rates increasing, and turbulent economic times are imminent.
The misplaced outrage at corporate greed, blaming it for soaring energy prices would be better directed towards where the fault truly lies: with government.
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