Gas and Oil Crisis

Even though the gas and oil crises are effecting each other and came at the same time, their causes were separate.

During the first Covid lockdown (starting in March 2020) the UK’s energy consumption dropped due to people not going out. This meant that there was initially excess supply. This caused energy prices in the UK to drop to a record low (see the drop in mid-2020 on graph below). Due to the invisible hand, many firms entered the market due to the incentive for high profits. Smaller energy companies decreased their prices for consumers in order to attract customers. This meant the small companies had much smaller profit margins than the big energy companies who barely changed their prices.

The government also banned disconnecting consumers during the pandemic which means that some companies were giving energy for free; which these small firms could not afford . This was the first red flag.

As demand for energy recovered, supply began to decrease (as it took time for producers to react to low demand). This caused wholesale prices to increase rapidly and reached a record high a few weeks ago. Within 15 months, the price of energy increased from 15p to 90p per therm. This put lots of stress on consumers but also for energy firms as wholesale prices were so high as well. This, in conjunction with consumers in fixed contracts and Ofgem’s consumer price cap meant that small energy firms were forced to continue selling energy at prices lower than what they were buying it for. This meant that lots of small businesses quickly became unprofitable and collapsed, leaving millions without an energy supplier.

The oil shortage is much more simple. The shortage of lorry drivers was worsened further by Brexit as many drivers were immigrants who didn’t feel comfortable in the UK after the vote. It is estimated that the UK is short of 100,000 drivers. BP, an oil and gas supermajor, announced that they were closing some of their petrol stations due to the shortage of supply. This in conjunction with the gas crisis and other factors, caused the British public to panic buy.

Unlike the oil crisis of the 1970s, there is currently a shortage of trained drivers to deliver oil, rather than a shortage of oil itself. The situation is already slowly resolving as the public are begining to understand what is going on. Queues that were hours long last week are now smaller. This short crisis was caused by a lack of understanding and a large information gap between the public, the government and oil firms.