We need to invest in renewables – but we need to invest in oil and gas, too

We need heavy investment in renewable energy, says Merryn Somerset Webb. But we also need continued investment in fossil fuels, to keep prices low and limit hardship on the way to net zero. 

North Sea oil rig
This year’s windfall for oil follows huge losses in the pandemic
(Image credit: © Andy Buchanan/AFP via Getty Images)

This month has been a good one for the UK’s oil giants. Last week Shell reported 2021 earnings of $19.3bn and this week BP announced its best profit numbers in eight years. Add up what these two are making and it comes to real money, says Labour’s Anas Sarwar. Think “£44,710 a minute”. That doesn’t sound fair does it – particularly when all our energy bills are soaring?

Luckily there are politicians aplenty with ideas about how to make it fair. Here’s the Lib Dems’ Ed Davey on the matter. “It just cannot be right that these energy companies are making super profits without suffering an extra tax while people out there are too scared to turn their radiators on.” Labour is with him: it reckons it is time for a windfall tax on North Sea oil profits. That sounds logical – after all, as windfall-tax fans point out, the extra profits are nothing to do with these firms’ own cleverness and everything to do with global supply and demand dynamics. However, the truth is that the idea is really anything but logical.

First, it isn’t clear that the big oil firms are seeing much of a windfall at all. As economist Julian Jessop points out, they took massive lockdown-related hits in 2020. Add 2020 and 2021 together and “energy firms are still worse off than if the pandemic hadn’t happened”. No windfall here. Still, let’s ignore 2020 – everyone else does – and just think about 2021. Yes, the oil companies have done well, but will we get what we want by taxing them even more this year than we did last year? (Note that the marginal tax rate on UK North Sea production is already around 40%, so higher than standard UK corporation tax.)

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Investing in what we really need

We want to see heavy investment in the renewable energy we need for transition. BP says it intends to increase spending on renewable energy to 40% of total expenditure by 2025. Add that to Shell’s commitments in the area and these two are some of the biggest players in the renewables sector. A lot of the money being made from keeping today’s energy show on the road is being poured into getting tomorrow’s under way. That, to my mind, is the very definition of the kind of sustainable we should be encouraging – not penalising.

We also need oil and gas. Right now we are more than 80% reliant on non-renewable fuels in the UK and as Paul Jourdan of Amati Global Investors points out, our own UK Climate Change Committee estimates that we will consume 18.3 billion barrels of oil equivalent (boe) of oil and gas over the next three decades with a mere 8.5 billion boe of that coming from the North Sea. That’s not really enough, in energy security terms or in price terms (oil prices are global, but the gas price is local). Cutting fossil-fuel production in the UK (by giving firms an incentive to go elsewhere, or just to stop exploring) makes no sense at all. Better to create an incentive for more production, so that we can keep prices low and limit the hardships on the way to net zero.

This is not, I think, complicated stuff. But I can make it even easier perhaps for the tax-them-now crowd to grasp with a simple question. When you have a supply problem that is driving prices up to lifestyle-destroying levels, should you a) make the problem worse by introducing measures that will almost definitely reduce supply further, or b) work to increase supply? This is not a trick question.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.