GIF Comment: European energy industry is suffering from underinvestment in fossil fuel E&P but changing this trend needs political will
Katya Zapletnyuk
30-Nov-2022
LONDON (ICIS)–Global diamond giant De Beers managed to create and monopolise a vanity-driven market amid an economic downturn by seizing control of worldwide supply and demand while marketing the stone as a symbol of love and loyalty.
Artificial scarcity drove up the price while the psychological appeal lead to a 55% increase in diamond sales in the US between 1938 and 1941 alone.
As a result, even low-income customers willingly pay double the real worth of a diamond ring without thinking twice.
Ethical or not, the emotions-led marketing strategy worked for a luxury market. However, it may have much more serious consequences for a commodity covering basic human needs – such as energy.
Russia’s military actions in Ukraine cut out a large chunk of global – and especially European – energy resources at a time when the political and public message has been to divest from traditional energy sources. Unexpectedly faced with surging natural gas prices and a cost-of-living crisis, EU and UK politicians have found themselves in heated debates about price caps and consumer support.
In order to have extra cash to hand out governments must take it from someone else and taxing the “super-profits” of oil and gas producers seems like a logical step and an easy sell to the public.
The UK Chancellor of the Exchequer Jeremy Hunt announced in the Autumn Statement on 17 November that the Energy Profits Levy on oil and gas companies will increase from 25% to 35% from 1 January 2023 to 31 March 2028. The UK government also plans to introduce a temporary 45% levy on electricity generators from 1 January 2023 to boost energy efficiency. The Energy Price Guarantee will continue from 1 April 2023 for one year, increasing from £2,500 to £3,000 for the average household. The government expects the higher windfall taxes to raise over £55bn (€63.5bn) from this year until 2027-28.
The announcement came just a few weeks after the UK North Sea Transition Authority (NSTA) launched its 33rd Offshore Licensing Round expecting to give out up to 100 licenses in four gas-rich priority cluster areas. The latest round is the first one since July 2019 and could reverse the trend of falling UK Continental Shelf (UKCS) production.
UKCS output dropped to its lowest point of 32.5 billion cubic metres (bcm) in 2021, according to the Department of Business, Energy, Industry and Strategy (BEIS). However, the ongoing uncertainty and constant changes to the fiscal regime could drive investment out of the UK and encourage some companies to leave the basin, according to Mark Wilson, HSE & Operations Director at industry body Offshore Energy UK (OEUK).
“Low levels of exploration mean on a ten-year average, we are replacing only 10% of the reserves we need to sustain the production levels that can help to keep the UK energy secure and power its energy transition,” he said. Other energy observers noted that, unlike during previous economic boom and bust cycles, the oil and gas industry hasn’t been reacting to high prices with more investment.
“This means demand will have to do all the work to rebalance the oil market. The result is likely to be a slower economy and more sustained energy costs than in the past,” according to Bloomberg energy columnist Javier Blas. At the same time, Big Oil has reported its best-ever six-month period, earning more than $100bn in profits from April to September, according to Blas.
Perhaps changing the emotional perception of fossil fuels would do much more for helping the economy than putting a limited amount of cash from one pocket to another.
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