Why Energy Prices are Rising: A Brief Explanation

Fri Sep 23 2022

Introduction

With the budget being released today in the UK, one of the most pressing concerns as we look ahead to the rest of 2022 is the steep increase in energy prices that is being exhibited nationwide for consumers. This is also not an increase of 10, 20, 30% - we're talking multiples of what these same utilities cost at the beginning of the year. Of course, for those running small businesses or struggling to make ends meet, this is deeply concerning. It is likely to have a catastrophic effect on their wellbeing, particularly at a time of existing economic uncertainty. With that in mind, we're taking a look at what's causing the changes and what this might mean in a broader context.

The factors that are causing energy prices to rise

There are numerous, but the three primary drivers are:

  1. The international price of crude oil has increased significantly since the start of the year
  2. The pound has weakened against the US dollar
  3. Greenhouse gas emissions trading schemes have become more expensive

These are all important factors to consider, but none are new developments. So why have energy prices increased so significantly in such a short space of time?

The answer, unfortunately, is not straightforward. We're currently in the midst of a perfect storm when it comes to energy prices, and the combination of these three factors has resulted in what we're seeing now. Let's take a closer look at each one.

The international price of crude oil has increased significantly since the start of the year.

This is, perhaps, the most important factor to consider. The international price of crude oil is a major driver of energy prices in the UK, and we've seen a significant increase since January. There are a number of reasons for this, but the most important is the ongoing recovery from the Covid-19 pandemic.

As global economies begin to reopen, there is a growing demand for oil, which has driven prices up. This is compounded by the fact that many countries are still operating at reduced capacity, meaning that there is less oil available on the market. The situation is further complicated by the fact that a number of major oil-producing countries are currently experiencing issues with their supplies. For example, production in Libya has been disrupted by conflict, and there are concerns about the stability of supplies from Iran. An increase in the international price of crude oil, which is then passed on to consumers in the form of higher energy prices.

The pound has weakened against the US dollar

The second major factor is the exchange rate between the pound and the US dollar. The UK imports a large amount of its oil from overseas, and so the price is set in US dollars. This means that when the value of the pound decreases, the cost of oil increases.

We've seen a significant decline in the value of the pound since the beginning of the year, as uncertainty around Brexit and the Covid-19 pandemic has weighed on the currency. This has made imported oil more expensive, and is one of the reasons why energy prices have increased.

Greenhouse gas emissions trading schemes have become more expensive

The third factor is the cost of greenhouse gas emissions trading schemes. These are designed to incentivise businesses to reduce their emissions, and the cost is passed on to consumers in the form of higher energy prices.

The price of these schemes has increased significantly in recent months, as the UK government looks to meet its climate change targets. This has put upward pressure on energy prices, and is likely to continue to do so in the future.

Unfortunately, there is no easy solution to this problem. The only way to bring prices down is to reduce demand or increase supply, and neither of these are likely to happen in the short-term.

What this means for consumers and businesses

This means that energy prices are likely to remain high for the foreseeable future. This is a major concern, as it will put upward pressure on inflation and squeeze household budgets. It's also likely to hit businesses hard, as they grapple with the increased costs of running their operations. There isn't really a way to sugar coat it.

How people can prepare for higher energy prices

How do you prepare for your living costs increasing? It's not an easy question to answer, and one that has caused a few politicians to come unstuck. You certainly don't need to be told to cut down on unnecessary expenses any more times.

That being said, there are a few things that people can do that might help. First, they can make sure that their homes are as energy efficient as possible. This will help to reduce their energy usage, and therefore their bills. Second, they can shop around for the best deals on energy tariffs. This is becoming increasingly important as prices rise, as there is a lot of competition in the market. Finally, they can consider switching to a green energy tariff. This will be more expensive in the short-term, but will save money in the long-run as prices continue to rise.

Keep a close eye on your usage and make sure you're only being charged for what you're using. Gas for example, is often estimated based on previous years' usage. By taking a reading of your gas meter and updating the energy company, you can often claim back increases in tariffs.

The impact of rising energy prices on the economy

Unsurprisingly, rising energy prices are likely to have a negative impact on the economy. This is because they will increase inflation, and squeeze household budgets. This will lead to lower consumer spending, which will in turn lead to lower economic growth. In addition, businesses will also be hit hard by the increased costs of running their operations. This could lead to job losses and a decline in investment.

The government is likely to come under pressure to do something about rising energy prices. However, there is no easy solution to the problem. The only way to bring prices down is to reduce demand or increase supply, and neither of these are likely to happen in the short-term. This means that we are likely to see energy prices remain high for the foreseeable future. This is bad news for consumers and businesses, and is likely to have a negative impact on the economy.

Conclusion

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