How Gordon Brown is choking UK oil industry
How Gordon Brown is choking UK oil industry >> .:thebusinessonline.com:.
By : Matthew Lynn October 23, 2005
THERE is a very retro feel to the British economy right now. The high-street shops are finding life tough. Unemployment is starting to climb. Prices are rising. The budget deficit is spiralling out of control. The word “stagflation” has crept back into hushed conversations.
And the Chancellor of the Exchequer, Gordon Brown, blames it all on oil prices making it sound as if the sheiks are holding us all to ransom, just like the 1970s. But hold on a second. Isn’t there something a bit odd about Brown’s explanation? Isn’t the UK a major oil producer? And shouldn’t a high oil price at least be helping us as much as Brown claims it is hurting us?
Certainly Britain is no longer as big in the oil business as it used be. And the person responsible for that is Brown. You wouldn’t, of course, realise that from listening to the Chancellor. He’s been busy telling everyone that the soaring price of oil is largely responsible for the slowdown in the British economy in the past year.
Last month, he downgraded his forecast for British growth this year. “The impact of the oil price rise is more considerable than was earlier thought,” he told reporters in Washington when he announced that decision. Energy costs for both businesses and consumers were rising, he continued, “and I think that will be seen in all the major industrial economies in the next few months”. But there is a flaw in this argument: Britain is still a major producer of oil. The UK exported 64.5m tons of oil in 2004 and imported 62.5m, according to the Department of Trade and Industry. That sounds like a surplus, although not a very big one.
And therein lies the problem. Of all the world’s major oil producers, the one which has shown the greatest drop in production in the past five years is Britain, according to research by Barclays Capital. Not even war-torn Iraq. Britain’s oil production has fallen by 1m barrels a day since 1999. “The UK has then been the major drag on the supply side, and in effect a further adjustment for the key Opec members to make in addition to compensating for Opec members with lower capacity,” Barclays Capital noted in a recent analysis of oil supplies. “That is one reason why Gordon Brown has raised some eyebrows among Opec producers by blaming them for higher prices . . . Some producers whisper that on its performance this decade, the UK might not be the first place a government would seek advice about how to run a national oil sector.”
Not that that would stop Brown. He has been dishing out advice on how to run the oil industry. Last month, for example, he said how he had spoken to the Russians and Norwegians about boosting non-Opec production. After the last Group of Seven summit, the French finance minister Thierry Breton announced that he and Brown would lobby some of the largest oil producers by mid-October on behalf of the G7 to make oil markets more transparent and “more predictable”.
Yet perhaps instead of hassling the world’s oil barons with his opinions, Brown should have spent more time listening to those of British ones, such as BP boss Lord Browne, who knows something about oil.
Let’s go back to 2002, when Browne was telling MPs that the Chancellor’s decision to pile extra taxes on North Sea producers was going to deter investment and, in the long run, production. “Those steps are likely to reduce investment and to hasten the decline of production,” Browne told an oil and gas industry group at the House of Commons. “I hope it isn't too late for reconsideration and dialogue.”
Except of course it was – re-consideration isn’t Brown’s speciality. A few weeks beforehand, the Chancellor had imposed an extra 10% duty on profits made by the North Sea producers. BP estimated the decision cost it an extra £120m in lost profits, and £600m for the industry as a whole. Not surprisingly, investment in North Sea production started to decline – for example, soon after the special tax was imposed, BP decided to sell its Forties Field, the biggest find in British waters.
In oil production terms the North Sea is a declining area. But in the oil business, oil wells don’t usually run dry. It just gets harder and more expensive to extract the black stuff.
Capricious tax changes of the sort Brown introduced in 2002, and again last year, deter investment. The reason is obvious to everybody – except Brown. What’s the point of sinking tens of millions into extending the life of oil wells if the investment is going to be taken from you in extra taxes? Not surprisingly, oil companies have decided they are better off investing in Kazakhstan, Algeria, even Russia, where there is less risk of governments taking your money as soon as you start making a decent profit.
Despite that, there are rumours of yet another hike in North Sea taxes. A former head of tax at the Treasury predicted last week that another rise was under consideration. The UK Offshore Oil and Gas Industry warned last month the industry should not be “put at risk from poor regulation, escalating costs and further tax hits”.
Despite Brown’s efforts, Britain is still a major oil producer – the 11th-largest in the world. We haven’t heard the Russian finance minister, or any Saudi princes, complaining about high oil prices. Neither should the British Chancellor be complaining. Instead he should be celebrating the extra tax revenues, and the renewed prosperity for oil towns like Aberdeen.
In his management of the UK’s oil industry, Brown has given us a portrait in miniature of his management of the British economy. If it moves, tax it. When it all goes pear-shaped, blame somebody else. It is not a pretty sight.
By : Matthew Lynn October 23, 2005
THERE is a very retro feel to the British economy right now. The high-street shops are finding life tough. Unemployment is starting to climb. Prices are rising. The budget deficit is spiralling out of control. The word “stagflation” has crept back into hushed conversations.
And the Chancellor of the Exchequer, Gordon Brown, blames it all on oil prices making it sound as if the sheiks are holding us all to ransom, just like the 1970s. But hold on a second. Isn’t there something a bit odd about Brown’s explanation? Isn’t the UK a major oil producer? And shouldn’t a high oil price at least be helping us as much as Brown claims it is hurting us?
Certainly Britain is no longer as big in the oil business as it used be. And the person responsible for that is Brown. You wouldn’t, of course, realise that from listening to the Chancellor. He’s been busy telling everyone that the soaring price of oil is largely responsible for the slowdown in the British economy in the past year.
Last month, he downgraded his forecast for British growth this year. “The impact of the oil price rise is more considerable than was earlier thought,” he told reporters in Washington when he announced that decision. Energy costs for both businesses and consumers were rising, he continued, “and I think that will be seen in all the major industrial economies in the next few months”. But there is a flaw in this argument: Britain is still a major producer of oil. The UK exported 64.5m tons of oil in 2004 and imported 62.5m, according to the Department of Trade and Industry. That sounds like a surplus, although not a very big one.
And therein lies the problem. Of all the world’s major oil producers, the one which has shown the greatest drop in production in the past five years is Britain, according to research by Barclays Capital. Not even war-torn Iraq. Britain’s oil production has fallen by 1m barrels a day since 1999. “The UK has then been the major drag on the supply side, and in effect a further adjustment for the key Opec members to make in addition to compensating for Opec members with lower capacity,” Barclays Capital noted in a recent analysis of oil supplies. “That is one reason why Gordon Brown has raised some eyebrows among Opec producers by blaming them for higher prices . . . Some producers whisper that on its performance this decade, the UK might not be the first place a government would seek advice about how to run a national oil sector.”
Not that that would stop Brown. He has been dishing out advice on how to run the oil industry. Last month, for example, he said how he had spoken to the Russians and Norwegians about boosting non-Opec production. After the last Group of Seven summit, the French finance minister Thierry Breton announced that he and Brown would lobby some of the largest oil producers by mid-October on behalf of the G7 to make oil markets more transparent and “more predictable”.
Yet perhaps instead of hassling the world’s oil barons with his opinions, Brown should have spent more time listening to those of British ones, such as BP boss Lord Browne, who knows something about oil.
Let’s go back to 2002, when Browne was telling MPs that the Chancellor’s decision to pile extra taxes on North Sea producers was going to deter investment and, in the long run, production. “Those steps are likely to reduce investment and to hasten the decline of production,” Browne told an oil and gas industry group at the House of Commons. “I hope it isn't too late for reconsideration and dialogue.”
Except of course it was – re-consideration isn’t Brown’s speciality. A few weeks beforehand, the Chancellor had imposed an extra 10% duty on profits made by the North Sea producers. BP estimated the decision cost it an extra £120m in lost profits, and £600m for the industry as a whole. Not surprisingly, investment in North Sea production started to decline – for example, soon after the special tax was imposed, BP decided to sell its Forties Field, the biggest find in British waters.
In oil production terms the North Sea is a declining area. But in the oil business, oil wells don’t usually run dry. It just gets harder and more expensive to extract the black stuff.
Capricious tax changes of the sort Brown introduced in 2002, and again last year, deter investment. The reason is obvious to everybody – except Brown. What’s the point of sinking tens of millions into extending the life of oil wells if the investment is going to be taken from you in extra taxes? Not surprisingly, oil companies have decided they are better off investing in Kazakhstan, Algeria, even Russia, where there is less risk of governments taking your money as soon as you start making a decent profit.
Despite that, there are rumours of yet another hike in North Sea taxes. A former head of tax at the Treasury predicted last week that another rise was under consideration. The UK Offshore Oil and Gas Industry warned last month the industry should not be “put at risk from poor regulation, escalating costs and further tax hits”.
Despite Brown’s efforts, Britain is still a major oil producer – the 11th-largest in the world. We haven’t heard the Russian finance minister, or any Saudi princes, complaining about high oil prices. Neither should the British Chancellor be complaining. Instead he should be celebrating the extra tax revenues, and the renewed prosperity for oil towns like Aberdeen.
In his management of the UK’s oil industry, Brown has given us a portrait in miniature of his management of the British economy. If it moves, tax it. When it all goes pear-shaped, blame somebody else. It is not a pretty sight.
posted by Marcel at 11:50 AM
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