The rise and fall and rise again of North Sea oil (to be followed by another fall)

So, no triple dip recession, then – and maybe no double dip either, once the final figures are sorted out. Of course, the whole narrative around multiple dips always was absurd – as if bumping along just under and over zero growth was worse than an equally long period of consistently negative growth.

In any case, the short-term variations in the growth line tell us very little about the overall state of the economy when such zigs and zags are due to extraneous factors like North Sea oil production. Consider, for instance, the following report from the Economist:

• “In March 2012 Elgin began leaking gas, leading to a year-long shutdown. With Buzzard, one of the region’s largest oilfields, also closed for maintenance last autumn, production plunged. Falling oil and gas output was the main reason Britain’s economy shrank by 0.3% in the last quarter of 2012. It had also helped knock the economy into recession a year earlier.”

And there you go, the odd leaky pipe and what spews forth isn't just gas and oil, but a torrent of political and journalistic guff about what the latest GDP figures (at the time) meant for the economy.

As always, the real meaning is in the longer term trends – and on North Sea production these are very interesting:

• “Britain’s fields are old and in long-term decline. But the immediate news is better, both for the industry and for George Osborne, the chancellor of the exchequer. Drillers are coming back to British waters. Over the next few years fresh investment will bring a mini-bonanza that will boost output from the equivalent of under 1.5m barrels of oil a day to 2m, according to Oil & Gas UK, a trade body (see chart). That should mean a handy boost to government revenues, already over £7 billion ($10.9 billion) in the 2012-13 fiscal year.”

Good news. But why didn’t this investment happen a few years earlier, when the economy really could have done with it? Part of the answer is oil price fluctuations, but the other part is the astounding short-sightedness of UK government policy:

• “...the age of British fields is not the only drawback for oil companies, which operate and allocate capital globally. In recent years they have found more welcoming homes for their cash. Oilfields need lots of money invested over a long time, so the industry prizes stable taxes as much as striking a gusher. On that count Britain has proved a great disappointment over the past decade.”

The trouble started in 2002 when, with the North Sea already in need of new investment, Gordon Brown thought it would be a good idea to introduce a “supplementary charge” on production:

• “...the charge, introduced in 2002 at 10% and raised to 20% in 2006, is blamed for some of the recent slowdown. The 2006 increase probably accounts for a big drop in field development in 2008 and 2009, which fed through to lower output by 2011.”

At first, George Osborne compounded Brown’s error by raising the charge still further. But since then Treasury policy has got a lot smarter:

• “What, then, accounts for the rebound? A high oil price has helped. So has the extension of small-field allowances, important in a well-explored region where big finds are less common, and improved terms for gloopy heavy oil, which is pricier to extract and process. A brownfield allowance is encouraging smaller firms, such as Talisman and Apache, to buy less-productive older assets that the supermajors are leaving to concentrate on bigger, more profitable projects elsewhere.
• “An increasingly active market for assets that can be better drained of oil by smaller specialists got another helping hand in the 2013 budget. After long negotiations the industry won a deal to guarantee tax relief on decommissioning costs irrespective of future changes to tax rates.” 

North Sea oil therefore provides a model for economic policy: Reasonable, well-designed and stable taxes encourage investment, thereby boosting tax revenues. But, warns the Economist, “it might not boost Mr Osborne’s political fortunes”:

• “The splurge of investment is unlikely to pay off handsomely until after the next general election, due in 2015.”

Thus, as things stand, the past, present and future of the situation can be summarised as follows: Labour mess things up; Conservatives, after some messing around, put things right; Labour come back and claim the credit (and then mess things up again, most likely).

It would seem that North Sea oil also provides a model of British politics.