{"id":18375,"date":"2022-05-27T15:31:08","date_gmt":"2022-05-27T14:31:08","guid":{"rendered":"https:\/\/www.economicsobservatory.com\/?post_type=question&p=18375"},"modified":"2022-05-27T15:51:31","modified_gmt":"2022-05-27T14:51:31","slug":"measure-for-measure","status":"publish","type":"question","link":"https:\/\/www.economicsobservatory.com\/test\/measure-for-measure","title":{"rendered":"Measure for measure"},"content":{"rendered":"\n

Newsletter from 27 May 2022<\/strong><\/p>\n\n\n\n

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 \u2018temporary targeted energy profits levy<\/a>\u2019, as part of a series of measures to address the cost of living crisis.<\/p>\n\n\n\n

The new tax will help to fund a \u00a315 billion support package from Westminster, including \u00a3650 one-off booster payments for roughly eight million low-income households. The \u00a3200 loan scheme for energy bills announced earlier this year<\/a> has also been scrapped and will be replaced by a \u00a3400 grant for all households.<\/p>\n\n\n\n

Last week, the Economics Observatory posted an article discussing the economic case for and against such a tax<\/a>. 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.<\/p>\n\n\n\n

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\u2019s 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.<\/p>\n\n\n\n

With household energy bills increasing, and news this week that they are set to rise by a further \u00a3800 in October<\/a>, this level of profit seems unfair to many, sparking much of the debate on the windfall tax ahead of this week\u2019s announcement.<\/p>\n\n\n\n

Beyond the battlefields<\/h3>\n\n\n\n

Two Observatory pieces this week have provided explainers of why UK energy prices are rising<\/a> (by Richard Green at Imperial College) and how those increases affect fuel poverty and affordability<\/a> (by David Deller at the University of East Anglia).<\/p>\n\n\n\n

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<\/a>, and by Corrado Macchiarelli (NIESR) this morning<\/a>.<\/p>\n\n\n\n

Helen argues that the economic and geopolitical impact of Russia\u2019s invasion extends far beyond the initial oil price shock. As the world\u2019s 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\u2019s gas exports go to Europe and Turkey, with most of this westward-bound gas arriving via pipelines.<\/p>\n\n\n\n

Russia is going to have to find new customers, and fast. To expand its exports to Asia \u2013 to compensate for the European market share that it may lose over the next few years due to sanctions \u2013 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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Figure 1: The GDP cost of the war for the global economy<\/h4>\n\n\n
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