BP has done well out of the war in Ukraine. Soaring oil and gas prices that followed Russia’s invasion in February meant quarterly profits have tripled to just under £7bn. Only once, when oil prices hit a record level of almost $150 a barrel 15 years ago, has the energy giant posted higher profits.
It was only two years ago that oil prices briefly went negative in the early stages of the pandemic, but the big energy companies can expect little public sympathy.
News of BP’s bonanza came as the latest estimates emerged of the new energy price cap consumers can expect to come into force this winter and beyond. The forecasts from the research group Cornwall Insight suggest the average household will see their gas and electricity bills rise from just under £2,000 a year to just under £3,500 in October. Further increases are expected in 2023 and the squeeze on living standards will intensify.
This juxtaposition of massive windfall profits and the hardship facing millions of households prompted a furious response from the Labour party, the TUC and pressure groups. Even in normal times, BP profits of this size would raise an eyebrow or two. When the country is facing a cost of living crisis in large part caused by dearer energy bills, they are politically explosive.
No question, Britain has a long-term energy problem born of years of neglect. Too much energy is wasted heating badly-insulated homes and the case for investing more on retro-fitting is more powerful now than it has ever been. If ever there was a case of failing to mend the roof while the sun was shining, then this is surely it.
But there is also a pressing short-term problem. One early decision facing either Boris Johnson’s successor is whether to provide a third package of support for households to help with rising energy costs. This is a no-brainer: it will be one of the first items on the to-do list for either Rishi Sunak or Liz Truss.
The real question is whether the government is going to expect energy companies to pay towards the cost of this package, either by levying a higher windfall tax than the one it announced in May, or by removing the loophole that allowed companies a tax break for investment.
In truth, the energy companies have made themselves the softest of targets and BP certainly did itself few favours by announcing an increase in its dividend. True, pension funds will benefit, but the beneficiaries will mainly be the better off and not those deciding whether to eat or heat.
Strength of labour market unlikely to last
At the very start of the pandemic, the government took steps to prevent businesses going bust in droves. There was an array of measures including the furlough scheme, soft loans, grants, deferred tax payment, and business rate holidays.
Corporate failures remained low (and below pre-pandemic levels) despite the repeated lockdowns, but there was always some doubt about what would happen once the support was turned off. Now we know.
Latest insolvency statistics for England and Wales show a sharp increase in business distress. The number of company insolvencies was up by 13% between the first and second quarters, and by 81% year on year. The number of creditors’ voluntary liquidations – where the directors pull the plug on their businesses themselves – was at the highest level since modern records began in 1960.
The rise in insolvencies is perhaps less of a surprise than the continued strength of the labour market. Businesses clearly felt the impact of the withdrawal of government financial support but the ending of the furlough last Autumn did not lead to the expected rise in unemployment.
The strength of the labour market looks unlikely to last. Companies that survived the pandemic and the supply bottlenecks that followed the ending of lockdowns are now facing fresh headwinds from rising inflation. More firms will go out of business in the coming months and many of those that survive will only do so by axing jobs.