Consciousness of Sheep
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The benefit – and curse – of being an oil producing state is that you can be profligate without facing the economic consequences. In Russia, for example, income from the vast Caspian and Siberian oil and gas fields has obviated the need for income tax. In Alaska, the state government has been using some of its oil revenues to fund tax rebates. In Saudi Arabia, the vast income from oil has allowed the ruling dynasty to effectively buy off and export popular dissent.
Britain has been conservative in its use of oil revenue. But then again, extracting oil and gas from the North Sea has always been relatively expensive, so the income has never been quite as spectacular. Nevertheless, much of the economic boom between 1995 and 2008 was underwritten by the taxes levied on North Sea oil and gas. The North Sea was, if you will, the collateral that successive UK governments put up against the loans they took out (remember all of those New Labour PFI deals?).
Unfortunately, the North Sea is not the Arabian Peninsula of the Caspian Basin. Its productive life turned out to be significantly shorter. Both oil and gas production peaked in 1999 and have been falling rapidly ever since. Fortunately – or so it seemed – global conventional oil peaked in 2005, causing the huge price spike that triggered the 2008 financial crash. For the UK government, this looked like a silver lining because while the total number of barrels produced was falling; the price per barrel was rising fast; maintaining tax revenue.
UK governments since 2005 had been able to factor taxes on the North Sea into their public spending and borrowing calculations. Just as the Thatcher government was able to use income from the North Sea to underwrite the effective early retirement of a large swathe of the baby boom generation (using incapacity benefit as a quasi-pension), so the current government has been able to use oil revenues to cushion the impact of public spending cuts.
What almost nobody foresaw was that high oil prices would trigger a global oil and gas glut that resulted in prices falling from £140 dollars per barrel to just $30; with the fear that they might even fall to $20 before 2016 is out. For governments, this is catastrophic. Saudi Arabia has been liquidating its sovereign wealth fund to meet the shortfall, while Russia has been on a privatisation spree. The UK, of course can do neither of these things because the Thatcher government chose to squander oil revenues instead of saving them, and because successive Tory governments have already sold off just about everything that wasn’t nailed down.
In 2011/12, the UK government took in £11bn in taxes from the North Sea. By November last year, the Office for Budget Responsibility was predicting that this would fall to just £130m for 2015/16. Even this may be optimistic, as the industry trade body Oil & Gas UK, wants to reverse the relationship between government and producers via a permanent tax exemption together with subsidies to keep the industry solvent.
Without oil and gas revenues, government borrowing may get difficult. And given the current administration’s perverse tendency to cut their way to prosperity, it is more likely that the decline of the UK oil industry will result in a further round of cuts to public services and benefits.
