Article
21 September 2022, 3 min read

Whose oil is it anyway?

A 95 year old woman waits until 8pm before putting the TV on for a couple of hours because she’s terrified she won’t be able to afford her electricity bill. Why is this happening in one of the richest countries in the world?

A 95 year old woman waits until 8pm before putting the TV on for a couple of hours because she’s terrified she won’t be able to afford her electricity bill.

This is not OK!

So, why on earth is it happening in one of the richest countries in the world?

I heard Lilian describe her terrible situation on a radio phone-in the other week, and I haven’t been able to stop thinking about her since.

It’s my natural default to want to dig deeper, to understand why something is happening and to untangle the complexity of a situation, so I can make it easier for others to understand.

And that’s what I’ve done with the issue of rising energy prices here in the UK, and it’s what I want to talk to you about this month.

I’ve seen lots of posts on LinkedIn recently about the rising energy prices and, generally speaking, people don’t understand why costs have soared. It’s easy to blame Russia’s invasion of Ukraine, especially as that’s the narrative the UK Government is peddling. But it’s not the full story.

Now, I’m not a specialist, but I think there are three key areas we need to understand:

1. Who actually owns the oil / gas
2. How prices are set
3. Why the UK is particularly vulnerable (to volatile markets)

Who actually owns the oil & gas?

The UK Government has sold off licences to extract oil and gas from the North Sea. This means they have no stake, and neither do we, the public. The oil and gas companies own the supplies and sell them to the global market to the highest bidder.

It doesn’t matter that the supplies come from the North Sea. We have to effectively ‘buy back’ these resources derived from the UK at the market value.

This makes us vulnerable to the volatile market. If demand is high, the price rises. And, in this current system, there’s nothing we can do about it.

It’s true there’s a shortage of energy right now, with Russia ‘turning off’ the main gas pipelines in to Europe. But it’s not as simple as that.

The Government often tell us what’s convenient, and the media are complicit in this, and NOT what we need to understand.

Liz Truss and Jacob Rees-Mogg have an ‘energy plan’ to issue MORE licences for oil and gas – and fracking – exploration, justifying it as reducing the UK’s dependence on Russian oil.

But this won’t work.

There are not enough reserves in the North Sea to cover this, and even if there was, it takes many years from issuing a licence to extracting a drop of oil, or one cubic meter of gas.

So how is this going to benefit anyone in the near future? Will it help Lilian?

How are prices set?

The UK is particularly vulnerable to volatile gas markets for four reasons.

1. Many of us use gas - and a lot of it - to heat our homes
2. A good proportion of our electricity is generated by burning gas
3. Our energy market is privatised, so there is no scope for the Government to intervene, other than through legislation (in fact, overseas state-owned companies have a significant share, rather than the UK Government!)
4. We have virtually no gas storage facilities (more about this later)

OFGEM sets a domestic ‘price cap’ based upon what economists call ‘marginal cost’ which is set at the highest price regardless of the source.

In other words, it doesn’t matter whether it’s electricity generated from renewable sources or from gas, the cost to us as customers is the same.

Currently electricity derived from renewable sources costs one tenth of that produced by gas but because of this system, we continue to pay for our electricity based on the gas-generated price.

On a personal note, this is why even though we buy our electricity through Octopus (a renewable energy supplier) we pay more than we should – it’s all the more profit for the energy producers!

The UK Government might be freezing the ‘price cap’ at £2,500 for an average house, but this essentially means we are getting into national debt to provide financial support to energy companies.

Public money is funding excess profits.

Considering OFGEM was ostensibly set up to protect consumers from sharp practice in the energy market and to ensure fair competition, it doesn’t feel like it’s fulfilling its purpose.

Why is the UK so exposed?

The UK Government never thinks any longer term than the electoral cycle!

An example of this is the UK has virtually no gas storage compared to our European neighbours. We have a matter of days storage facilities, compared with Germany who have around 3 months’ storage capacity. So Germany, in normal circumstances, is better able to hedge against future price rises by buying in advance.

Recently, Germany has been filling up these gas storage tanks because of Putin shutting down the pipelines to ensure its security of supply over the winter. The consequence of this is that, this too, pushes up wholesale gas prices – which we, the consumer, end up paying for!

In addition, UK housing has poor energy efficiency. A better, long-term investment would be to upgrade housing design, insulation, boilers, windows etc. UK housing is three times ‘leakier’ than Sweden and Germany.

The UK Government is not acting in our best interests, nor in the interests of the planet.

Instead, they are protecting the interests of energy producers.

And, of course, their actions completely ignore climate change and the UK’s international commitments.

According to the IPCC, we must reduce our carbon emissions by 43% by 2030 to have any chance of keeping to 1.5c global temperature rise. Opening new oil fields to supposedly replace Russian supplies is not a zero sum game – Putin won’t shut down oil and gas fields just because we’re opening up new ones.

The International Energy Authority has warned there must be NO new oil or gas development. As it stands, we could be heading for 2-3c (probably more) temperature rises, which would be catastrophic.

I hear all this and then I remember Lilian.

We should expect more from those in power right now.

But what about business? What about us? Could we do better?

With our system relying on businesses to thrive, leaders like us are in a position of influence.

We might not be able to directly and instantly fix the energy price crisis, but we can demonstrate a better way of doing things.

We can run our organisations with our staff, the planet and the overall positive impact we want to make central to everything we do.

We can empower those in our organisation with knowledge and understanding of the big problems we face and help them to see what they too can do to contribute to change.

We can build brands that are ready for what’s to come.

Because we have a big task ahead of us – change is coming whether we like it or not.

We all need to be pulling in the same direction.

I know it sounds big, overwhelming and confusing and I appreciate saving the planet wasn’t necessarily part of the plan when you started your business.

But you’re not the average business leader.

You care. You hear about Lilian and you feel as upset as I did.

When you understand how the energy market – and its pricing – works, it’s hard not to feel angry and frustrated.

It’s clear the energy system we have is broken.

That’s why I support the principles of the Wellbeing Economy, which calls for systems change to place people and planet at the centre of our economy to give a good life to all on a thriving planet.

If you’d like to know more about the role you and your business can play in this time of great transition, please do click ‘reply’ and let’s arrange a no-obligation chat.