I thought the reason they were increased is so we could get the same power with reduced supply?
However a fair few power companies are reaching ridiculously high record profits, which goes against the grain of that idea.
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Oil has two features as a commodity: 1) demand is inelastic; 2) supply is limited.
Inelastic demand means that if prices go up, it’s hard for people to reduce the amount of oil they use. If you need a car to get your children to school or a van to deliver your goods it’s difficult to change that. The increase in natural gas prices only adds to this, since it’s now more expensive to switch from oil to gas, where that’s possible.
So if prices increase, companies make more money – prices might go up by 10% but demand only falls by 5%.
That means if companies put up prices then they can make more profits. What is meant to stop this happening is competition – if you push up your prices, another company will increase production, charge a lower price and undercut you.
With oil this is difficult. It takes a lot of time and investment to open up new wells and refineries to increase supply. OPEC operates as a cartel to limit supply – balancing out making profits, husbanding natural resources and not pissing off oil importers too much. And supplies from Russia have been disrupted by the war.
All that means is that when supply goes down for some reason or demand goes up, oil producers can make extra profits.
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