With UK households facing soaring energy bills, the government has announced a windfall tax on oil and gas companies. Whether this is enough to support those experiencing fuel poverty may depend on the duration of the war in Ukraine and its effects on the global economy.
Newsletter from 27 May 2022
After months of resisting pressures to introduce a windfall tax on oil and gas companies, the UK government has reversed course. On Thursday, Chancellor Rishi Sunak announced what he calls a ‘temporary targeted energy profits levy’, as part of a series of measures to address the cost of living crisis.
The new tax will help to fund a £15 billion support package from Westminster, including £650 one-off booster payments for roughly eight million low-income households. The £200 loan scheme for energy bills announced earlier this year has also been scrapped and will be replaced by a £400 grant for all households.
Last week, the Economics Observatory posted an article discussing the economic case for and against such a tax. The piece, by Barry Naisbitt, Urvish Patel and Stephen Millard (National Institute of Economic and Social Research, NIESR), focuses on the lack of a robust evidence base against which to assess a windfall tax on oil and gas companies, largely due to the lack of past examples. Despite this uncertainty, the authors provide useful context for the recent performance of these firms.
Energy companies have benefitted from the rise in global oil and gas prices in the post-Covid-19 recovery period, they argue. These firms have also profited from the sharp spike in energy prices following Russia’s invasion of Ukraine. For example, BP announced underlying profits of $6.2 billion in the first quarter of 2022 (up from $4.1 billion in the final quarter of 2021). Similarly, Shell announced adjusted earnings of $9.1 billion in the first quarter of 2022, up from $6.4 billion in the previous quarter.
With household energy bills increasing, and news this week that they are set to rise by a further £800 in October, this level of profit seems unfair to many, sparking much of the debate on the windfall tax ahead of this week’s announcement.
Beyond the battlefields
Two Observatory pieces this week have provided explainers of why UK energy prices are rising (by Richard Green at Imperial College) and how those increases affect fuel poverty and affordability (by David Deller at the University of East Anglia).
The impact of the war in Ukraine on energy markets and the wider global economy has been discussed further by Helen Thompson (University of Cambridge) in an article on Thursday, and by Corrado Macchiarelli (NIESR) this morning.
Helen argues that the economic and geopolitical impact of Russia’s invasion extends far beyond the initial oil price shock. As the world’s biggest exporter of natural gas, the second largest crude oil exporter and the third most significant coal exporter, Russia is heavily dependent on overseas buyers. In fact, around three-quarters of Russia’s gas exports go to Europe and Turkey, with most of this westward-bound gas arriving via pipelines.
Russia is going to have to find new customers, and fast. To expand its exports to Asia – to compensate for the European market share that it may lose over the next few years due to sanctions – Helen argues that Russia will have to build a second gas pipeline to China and substantially increase its liquified natural gas (LNG) capacity. This will come at an enormous cost to Russia itself and it will reshape the global network of energy supply and the wider market.
Corrado builds on this, exploring how the energy shock and crises of energy supply will affect the wider global macroeconomy. He argues that the main effects of the invasion will not only be higher energy prices, but also weaker confidence in the economy and financial markets.
Both the war and the sanctions imposed on Russia will also have a substantial effect on output, with global GDP likely to fall (see Figure 1 below). This contraction is set to be particularly dramatic in Russia with GDP predicted to fall by at least 10% in 2023.
Figure 1: The GDP cost of the war for the global economy
Source: National Institute Global Econometric Model (NiGEM) simulations
The war will simultaneously harm growth and put upward pressures on inflation, which is already at very high levels in many countries around the world. Whether this sharp contraction in GDP, together with surging energy and other commodity prices, will combine to cause a large global recession will depend on how the next phase of the conflict plays out. How policy-makers and central banks respond over the next few weeks and months matters too.
Communicating data
This week, the Observatory team have been in Glasgow, taking part in the 2022 Economic Statistics Centre of Excellence (ESCoE) conference on economic measurement at the University of Strathclyde. As well as showcasing our Data Hub and presenting the latest editions of ECO magazine, we also ran our first data masterclass. The session focused on how best to communicate economic data visually, and the skills that are needed for cleaning and presenting quantitative stories.
We first laid out our data philosophy in December 2020. In part a response to a disturbing report by colleagues from ESCoE, our approach seeks to push back against two of the report’s headline findings: a shortfall in public understanding of economics; and a lack of trust in data.
Since January 2021, almost all charts posted on our website have been built using embedded data (rather than static pictures). This means that anyone can download the underlying data and code, as well as verify and challenge them (try it with Figure 1 by clicking the dotted icon at the top right-hand side of the graphic). This approach was at the core of our data masterclass, and we hope that participants shared our belief that the fight against misinformation and the lack of trust begins with this transparent and replicable methodology.
Yesterday, the conference closed with a panel discussion co-organised by ESCoE and the Observatory. Sam Beckett (second permanent secretary at the Office for National Statistics, ONS and joint head of the Government Economic Service) chaired the session, which included Johnny Runge (NIESR, and one of the authors of the report on public understanding of economics), Owen Brace (director of communications and digital publishing at the ONS) and Ainslie Johnstone and James Fransham (both data journalists at The Economist).
The panellists covered a wide range of topics relating to communicating economic data – from improving the way we gather information to the framing of headline metrics. Two shared conclusions, and ones that sit at the heart of our own philosophy, are the importance of balanced, impartial and objective analysis and the need to relate the facts and figures to the real world and the lives of people they affect.
Building trust and improving understanding in economics requires data communication of the highest standard. As the war in Ukraine grinds on, and people around the world continue to struggle under the weight of escalating energy and food prices, effective communication is as important as ever.
