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Golden Egg - Cheryl Lindo Jones
Image: Cheryl Lindo Jones

When the golden goose stops laying

Cut through all of the political and economic nonsense that passes for theory, and you find that the history of the UK economy over the last 40 years boils down to just two little words – oil and gas.  The so-called Thatcher Revolution and the consolidation under Blair and Brown was little more than the state capture of revenues from the North Sea.  Without oil there would have been no Falklands war.  Without oil there would have been no “big bang” financial de-regulation to pay for the 30 year credit binge whose hangover we are now waking up to.  Without the revenue from oil underpinning the City of London, there would be no global banking hub.  Nor could there have been the tax cuts and state handouts to the corporations that run everything today.  Public sector services, pensions and benefits would have been unsustainable without the revenues from oil.

That greatest of all human failures – our ability to delude ourselves into believing that success is down to us, while failure is always due to someone else – blinded us to the role of North Sea oil in propping up our debt-based economy; so long as the party kept going.  But it could not go on forever.  The peak of North Sea discoveries was way back in 1970 – we are still finding tiny pockets of oil and gas that might be recovered in future provided that the price is high enough.  However, the North Sea as a whole had its production peak in 1999; production today is just a third of the oil and gas that we were producing then… and the sustained drop in prices since 2014 threatens even this.

The big oil companies can go elsewhere, of course.  There is still a lot of oil locked up in Canadian and South American tar sands.  Iran is beginning to ramp up its production.  And with prices rising once more, we may get another round of drilling in the US shale patch.  But none of this solves the UK problem of finding an alternative source of tax revenue to replace the losses from the North Sea.

Nor is this just about government borrowing.  The massive overhang of private debt in the UK economy is only sustainable if we can maintain the fiction that it will be paid back at some point in the future.  But that is only possible if the value of the Pound can be maintained; and that is only possible if an alternative revenue stream to North Sea oil can be found.  It looks likely that the current UK government bet the family silver on that new revenue stream coming from hydraulically fractured shale gas – something that would explain the governments continuing enthusiasm for an enterprise that was doomed from the start.

At this point, the best that we can do is to turn to the “captains of industry” for a solution.  With this in mind, we might ask the very highly paid CEOs of the oil industry for some leadership.  This, in effect, is what the government – through accountancy firm PwC recently did.  The answer that came back should scare us all:

“They suggested in the PwC report that the industry needed a dominant leading figure. This person may have to come from a different sector, to shake up inefficient, older-thinking of the existing regime.”

This, in CEO-speak is just another way of saying “we have absolutely no idea what to do”.  As Douglas Fraser writing for BBC Scotland observes:

“You know something’s really badly wrong with North Sea oil and gas, when the people who control it are calling for their own overthrow.”

This is where we need an honest examination of a key theme in The Consciousness of Sheep: we do not have a “problem”; we have a “predicament”.  A problem is something that can be solved.  A predicament is something you have to learn to live with.  Here it is worth listening very hard to recent comments about the global oil industry made by Shell CEO Ben Van Beurden:

“We are not a company that is sitting on 200 years’ worth of oil or gas for that matter. We are a company that has a reserves life of about 10 to 15 years, so therefore we do have the opportunity – and the need – to adapt as we go along.”

There is just one approach to mitigating the end of North Sea oil.  It is the approach that both Saudi Arabia and Norway have embarked upon – go renewable at home in order to eke out oil and gas exports (and tax revenues) for as long as possible.  This necessarily involves a rapid deployment of renewables.  But it also means some pretty unpleasant lifestyle changes.  Car use, for example, will have to be priced beyond what most people can afford.  Electric cars and an expanded electrified public transport system will mitigate some of this change.  But the sad truth is that one way or another we are going to relocalise the UK economy; since the alternative of burning the remaining oil and gas ourselves will take us to the same place via a different route – in essence, governments can either tax the price of petroleum above £3.00 per litre; or we can leave it to market forces to do the job for us.

Whether this will be enough to save the UK economy from meltdown is a moot point.  Both Saudi Arabia and Norway are able to pursue this strategy because both had the wit to set aside a proportion of their oil revenues in sovereign wealth funds (which they are now using to deploy renewables).  Successive UK governments chose instead to squander our oil revenues on state handouts to their corporate friends.

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