Record profits for Shell – now what about the windfall tax?

There is much anger at the “obscene” profits recorded by Shell – nearly $40bn worldwide in the last year. Big, even by Big Oil standards.

Only a few billion of that is generated in the UK, but it’s still large enough to be annoyed about. Oil companies are often called “wicked” and “evil” because they dig fossil fuels out of the ground, which is bad; and they make lots of money without trying very hard, which is equally unpalatable.

It is true, though, that they also made gigantic (albeit smaller) losses during the pandemic – $21.5bn in the case of Shell. There is added distaste for these latest profit figures because they are artificially inflated by the restriction of energy supplies after the wicked and evil war in Ukraine started by Vladimir Putin.

Naturally, people are now contrasting the ease with which an oil giant can generate more money than it needs, and without much effort, with the plight of poor, vulnerable people in poverty unable to pay their bills.

Disgracefully, we learn today just how cruelly bailiffs have been routinely authorised by British Gas and the courts to force themselves into people’s homes to fit more expensive pay meters (British Gas say they have suspended the practice).

It’s a situation that lends itself to moral outrage. Paul Nowak, general secretary of the TUC, said the profits were “obscene” and “an insult to working families”. To which I can only say, we shouldn’t blame the energy companies, but blame ourselves. It’s our own fault that we are where we are. We’re the fossil fuel addicts. The energy companies just sell us what we want.

Obviously we should levy a substantial “windfall” tax on Shell and the others, because, as they admit, it will make little difference to their investment plans. The current rate of 75 per cent may even be too modest, given the extraordinary way in which the profits have ballooned – about twice as big as they “ought” to be. It also seems foolish to offer them huge tax reliefs for exploring new gas and oil fields, given the climate crisis and the disappointing progress on meeting the Cop26 targets for CO2 emissions.

There’s an argument derived from economic theory that Shell’s profits are a reward for shareholders who take the risk of investing, and are needed to fund investment in future energy supplies, including renewables, but no one’s really listening to that sort of stuff at the moment. A more pertinent question is why the taxes on windfall profits are being used to subsidise consumers’ bills, which is giving them less incentive to economise on the gas and less cause to insulate their homes.

One of the more unfortunate consequences of the common headline that energy bills would be “capped” at £2,500 a year was that some folk thought they could therefore use as much gas and electricity as they liked and never have to pay more than £2,500 – a kind of “all you can eat” energy buffet. Mistaken as that was, there is still a sense that sharp price signals, which would encourage people to switch the thermostat down and put a jumper, on are being blunted by caps and subsidies.

A better use for the billions the government should and will raise in windfall taxes would be to pay for a massive national programme of home insulation, and accelerate investment in wind, solar and nuclear energy projects. Indeed, the energy giants could be told they can keep their money – but only if they spent it on wind farms and nuclear power plants, and not use it for North Sea exploration or to boost dividends and executive bonuses.

Imagine if almost all our energy was from a mix of sustainable sources, with a base load of nuclear power for when the sun doesn’t shine and the wind doesn’t blow. And the energy giants are the people with the expertise to make it happen. Then they’d be heroes, but it’s for government to push them in the direction of building a green paradise. At the moment they do quite nicely out of selling us the gas we crave.

Helping poorer households is an absolute moral obligation, but it is best done by endowing the nation with cheap sustainable energy. Meantime, help with the cost of living crisis is really a matter for the tax and benefits system, as it has to be in the longer term. That, however, means a more progressive system. But isn’t it easier just to pretend that Big Oil can always pay instead?

With the exception of the vegan climate activists who live principled, frugal lives, we are otherwise all terrible hypocrites. There would be no energy crisis and no windfall profits for the likes of Shell if we didn’t, for example, drive SUVs with petrol engines; if we didn’t heat our homes with convenient natural gas; light our cities with electricity generated from burning gas; if we didn’t fly twice a year to far off places for our holidays; if we didn’t eat so much meat, and drink so much imported mineral water… imagine that.

If we were more parsimonious, and less hypocritical, then Shell and the other big energy companies wouldn’t even exist, or at least they wouldn’t be in the fossil fuel business to quite the same extent. If our pension funds weren’t quite so reliant on regular and healthy dividends from these companies, not to mention other profitable concerns associated with fossil fuel energy consumption, such as, say, Toyota, then those companies would be simply starved of capital, and unable to function for very long.

But our pensions would be meagre. That, indeed, is very much the logic behind the Just Stop Oil protest movement, and the other campaigns to “defund” the old energy companies. Their logic is impeccable, but I do wonder if the public is yet ready for life without fossil fuels.

There’s an energy crisis, and a cost of living crisis alright; but also a cognitive dissonance crisis. We think these crises are nothing to do with us, that we’re victims of “Big Oil” – and after we’ve fumed about Shell for a bit, we load the kids into the diesel SUV, stopping off to refuel at the Shell garage, then take them to school round the corner, and then come home, stick another log in the burner and turn the thermostat up because, well, it’s a bit nippy, isn’t it?

I think there will be a couple of crunch points for us all in the next few years. First, will be when the ban on new cars fitted with internal combustion engines comes in over 2030 to 2035 (hybrids get a longer stay of execution). The general trend in taxing fuel will also push people away from petrol (diesel is already almost extinct) and towards battery-electric vehicles.

This is excellent news, except that electric cars tend to be more costly, and even the cheapest used models are much more costly than an equivalent petrol model. Battery electric vehicles are generally excellent to drive and their running costs are low, as well as green, but I just ask what poorer families used to picking up a car for £1,000 or £2,000 will do when they’ve all been scrapped.

No doubt economies of scale may help the electric car become accessible, but it’s hard to see that happening quickly enough for the personal mobility we have now to be maintained. And public transport is unlikely to be a viable alternative because, again as a matter of societal choice, taxpayers aren’t willing to subsidise uneconomic bus and rail routes.

Much the same goes for the switch from gas boilers (and those fashionable log burners) to electric-powered air and ground-source heat pumps. These work as sort of reverse-refrigerator placed on the outside of a building and they can either power traditional radiators or via elements in underfloor heating systems and the like. Some people are suspicious of them, and it’s fair to say they work best in well-insulated buildings designed for them.

Sadly, Britain’s often charming housing stock of Victorian terraces, Edwardian villas and 1930s semi-detacheds were meant for a world of coal and draughts. Retrofitting viable air-pump technology will be costly for householders – at least £5,000 each even with a state subsidy.

Apart from new-build homes after 2025, there won’t be an absolute ban on gas boilers, but there may be increasing official and price pressure to make the switch, for reasons of air quality and to reduce carbon dioxide emissions. Quite right; but who will pay? Shell, obviously.