Following the ease in covid restrictions, an excess demand for gas and electricity meant that prices for energy were already on the rise. The steep rise in wholesale prices of gas drove up the amount which energy providers pay for gas and electricity, causing the cost to be burdened onto its consumers.
Consequently, when Russia invaded Ukraine earlier this year, the economic situation surrounding energy prices significantly worsened. Prior to the invasion, Russia was the 2nd largest natural gas exporter in the world and 3rd largest for oil, hence, many countries, typically in Europe, were heavily reliant on Russia’s resources with Russia providing 40% and 50% of Europe’s gas and oil respectively. For the UK however, the initial situation was not as bad due to the fact that 45% of the UK’s gas came from the North Sea while Russia contributed to less than 5%. So, within hours of the initial invasion, oil prices surged over $100 a barrel while gas prices shot up by over 30% across Europe.
In order to stand against Putin and weaken Russia’s economy, The UK and US imposed sanctions to ban Russian imports of oil and gas and while the UK wasn’t has heavily reliant on Russian energy as compared to its European counterparts, the surge in gas prices has had a serious impact on our economy, especially with inflation which is currently at 11.1%. The UK’s independent advisory body - Climate Change Committee said that even if the UK was to increase oil and gas production in the north sea, it would have a marginal impact on lowering prices. Many oppose this notion, stating that an increase in domestic production is a better option as it would at least, for the short term, reduce reliance on Russia.
(Office for national statistics)
But the rise in energy prices in the UK are not all down to Russia’s invasion or the easing of Covid-19 restrictions ; the UK remains prone to these price increases as 85% of households use gas boilers to heat their homes, which are often poorly insulated. These factors meant that prices were set to rise to around £3,500 in October this year from £1,000 from last year and exceed £5,000 in 2023 before recent policy changes. When Liz Truss announced her energy price guarantee, it was implied that the average UK households’ energy bill would not go over £2,500 (regardless of income) for the next 2 years. Yet, following the disaster of Septembers ‘mini-budget’, which saw the value of the pound depreciate against the dollar significantly, the new chancellor, Jeremy Hunt announced that this would only apply until April of 2023 and increase by £500 to £3,000 from April as well.
So what does this mean for the future? No one is sure as to how long this crisis will prolong for, however high gas prices are likely to be around for a long time and while the surge in fossil fuel prices continues to drive up energy prices, countries are looking to transition to net zero carbon emissions by 2050 and right now seems like a good time to find alternatives not just to Russian energy but all non-renewable sources. This calls for various actions and investments to increase demand for clean energy whilst also deterring Putin, protecting the environment and instilling energy security. Along with policy, this entails habitual changes such as altering boiler settings in households or limiting the heating of public buildings, Improving efficiency in homes to prevent leakages and allow for lower bills, encouraging renewable energy such as the installation of solar panels or usage of electric cars - which low income households should be supported with to pave the way for them to be able to afford these investments. And finally expand cheap renewable energy - for example investing in wind farms, and encouraging solar farms on agricultural land rather than banning them. Renewable energy prices have already been falling with costs gone down by over 40% in the last 10 years. Hence, increasing these investments and implementations would cut energy bills and increase security of supply in the medium term.
Comments