The Middle East war is set to bring bumper profits for oil and gas producers just as the industry calls for the current windfall tax to be scrapped
The Middle East war is delivering booming profits at energy producers and more than £400million in windfall taxes for the government, it is claimed.
The conflict has sent wholesale oil and gas prices soaring, triggering pain at the pump for millions of motorists and the threat of punishingly high energy bills for most households. Yet while families suffer, some energy companies are set to coin it in through a profit bonanza. It is also likely to mean a boost to the Treasury’s coffers from heavy taxes on producers.
Labour’s new cost of living tsar has called for a temporary profit cap on energy companies and petrol retailers to stop them benefiting excessively from the conflict. Richard Walker, boss of frozen food chain Iceland, said: “As executive chairman of a retailer, I have no problem with profit. It’s what allows businesses to invest, employ people and pay tax. But I do have a big problem with profiteering, especially when families are under real pressure.”
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Sources have cautioned that the scale of the boost to energy firms is unclear at this stage. However, there has been speculation that oil giant BP’s annual profits could jump by £7.5billion thanks to the leap in prices.
Domestic energy suppliers are unlikely to enjoy the same boost as they have to buy in gas and electricity to meet customers’ needs. The amount of profit they can make is also controlled under Ofgem’s price cap.
Analysis by the End Fuel Poverty Coalition suggests, given where wholesale prices are, the government could expect around £200million in additional taxes through the Energy Profits Levy. If prices stayed at this level, this would result in annual boost of over £2.4billion.
The levy was the special extra tax introduced after prices surged following Russia’s full-scale invasion of Ukraine, when and company profits soared.
However, there is pressure to water down or scrap the levy. Reports say Chancellor Rachel Reeves is considering replacing the levy with a lower duty.
North Sea producers also pay a higher rate of corporation tax on their profits. If this is included, the analysis claims the total among of windfall tax collected by the government could amount to £427million a month, or £5.1billion a year.
While the extra money is helpful for the government, it comes amid pressure on ministers to step in provide support for households if energy bills jump later this year.
Leading industry experts Cornwall Insight last week forecast regulator Ofgem’s price cap will surge to nearly £2,000 a year by the summer because of the Iran war. It hiked its estimate by more than £330 after the sharp rise in the wholesale cost of gas.
Simon Francis, coordinator of the End Fuel Poverty Coalition, said: “Anyone still arguing against the Energy Profits Levy should hang their head in shame. Whenever oil and gas prices spike, energy industry profits rise while households are left to face higher bills, deeper debt and impossible choices. It is only fair that these windfall profits help households who will suffer as a result of the increases in energy bills.
“Our message to ministers is simple. Help the hardest-hit households first and be ready to move fast if this crisis gets worse. That means urgent support for off-gas homes and heat network customers, targeted bill cuts if prices rise again, action on energy debt and stronger winter protection. It would protect people now while longer-term reforms bring bills down for good.”
The coalition – made up of more than 100 charities, health organisations, housing groups, trade unions and consumer bodies working to end fuel poverty across the UK – claims energy firms have already made more than £125billion in profits on their UK operations since 2020.
Robert Palmer, deputy director at the group Uplift, said: “Billpayers didn’t ask for this war and are now facing a huge Trump Tax on petrol, mortgages and food, with sky high energy bills looming once the current price cap ends. Yet once again, as we saw in Ukraine, oil and gas companies are profiting from what is a humanitarian crisis.
“The extra billions they stand to make from the crisis should be taxed and used to support people through the economic pain that’s on its way. Ultimately the only way to bring down bills over the long term is to get off our reliance on oil and gas, and invest as fast as we can in renewables”.
Jonathan Bean, spokesperson for Fuel Poverty Action, said, “Instead of the £300 bill saving the Government promised us, we now face a £300 bill jump from July. The Government failed to fix the market after the 2022 crisis, so we’ve been left vulnerable to price spikes. The Prime Minister needs to get a grip on the obscene profiteering from war, close windfall tax loopholes, and bring down our bills.”
Enrique Cornejo, policy director at offshore trade body OEUK, said: “It is important to distinguish between global company performance and what is happening in the UK North Sea.
“Oil and gas companies generate profits from operations around the world, but returns from UK oil and gas production remain weak, UK operators have seen a negative rate of return for the past seven reported quarters.
“In the UK capital investment is falling sharply, exploration has collapsed to zero wells last year, and the UK continues to be a highly challenging environment in which to invest. High global prices do not automatically translate into profitable UK operations.”
He added: “We are not calling for the windfall tax to disappear. We are calling for the successor regime to the Energy Profits Levy to be implemented now.
“The Oil and Gas Price Mechanism ensures the industry pays higher taxes when genuine windfall conditions exist, as they do today, while also restoring the ability to invest when prices are lower. This is essential to unlock investment needed to sustain domestic production and avoid an increasing reliance on imports. The UK will need oil and gas for decades to come. The real question is not whether we use it, but whether we produce more of what we need at home or import it from elsewhere at higher cost and higher emissions.”
British Gas owner Centrica saw annual profits more than triple to £3.3billion in 2022 after Russia’s full-scale invasion of Ukraine saw energy profits jump. Sources stressed that circumstances were different this time around.
Chris O’Shea, boss of Centrica, said: “If the Exchequer is taking four-fifths of what you are making, I’m not sure there is much room for manoeuvre.”
He said higher household energy bills were “inescapable” if wholesale prices were to remain at current levels for the next 10 weeks. But speaking to the BBC, he added: “My gut feeling is that we will see more of an impact at the petrol pump than we will on bills.”
Mr O’Shea also repeated the firm’s call for an energy social tariff that would use government data to ensure those most in need pay less for gas and electricity but the better off pay more. “It is self-funding and doesn’t require any money from the Treasury,” he said. “But I do think targeted help is far better than blanket help.”
