Where did all the oil money go?

June 1st, 2008

Sunset on the North Sea; image courtesy of BBC

Why has Britain squandered its oil wealth? It’s a question that really deserves to be given more credence, especially given how vulnerable our economy has become to global financial mood-swings after over a decade of Labour leadership.

A recent study from PricewaterhouseCoopers shows that Britain – which remains one of the world’s leading oil producing countries and was consistently producing more than two million barrels of oil a day from the North Sea throughout the 1980s and 1990s – could by now have built up a sovereign wealth fund of about £450 billion by now. That would make it one of the world’s largest, and better endowned those of Kuwait, Russia and Qatar combined.

However rather than set up such a fund, our short-termist politicians at Westminister have preferred to waste the resources from the North Sea on other things. This seems to have been partly driven by a desire to undermine Scottish nationalism, for if the money could get lost in the wider Treasury books then rebellious Scots would be less aware of the vast proceeeds being generated off their shores.

So the money instead went into funding unemployment benefit as Thatcher wrestled to reconstruct the UK economy during the 1980s and other short-term spending. Significant portions of the money was channelled straight into the UK’s extravagent social security budget.

It didn’t have to be like this.

Norway has shown what can be achieved. The Scandinavian country, which has a population of 4.7 million people, has used tax receipts from its oil and gas fields in the North Sea and continental shelf  to build up a £322bn fund. The money is carefully invested in overseas stocks and bonds to save for a future when the black gold runs out.

Middle Eastern states have also had much more foresight than the benighted crowd in Westminster. They have recently used their sovereign wealth funds to take stakes in Wall Street banks which ran into difficulties because of the global credit crunch – a risky punt that may yet come good.

John Hawksworth, chief economist at PwC, says that even if the UK had channelled only half its North Sea riches into a wealth fund, the fund would be bigger than that of Kuwait (£213bn) and not far behind Norway’s.

Even though oil prices have surged from less than $20 to more than $130 since about 2001, Hawksworth believes that the UK has missed the boat when it comes to establishing such a fund. Oil revenues rose from almost nothing in the 1973 to be worth over 3% of GDP (about £45bn in current money) at their peak in 1984-5. They are now worth around 0.5% of UK GDP.

However even at this eleventh hour, there are politicians who are prepared to think long-term. Alex Salmond for example. Scotland’s first minister has been calling for the establishment of an oil fund that would enable Scots to benefit from the resources beneath the North Sea for many years. Speaking when still in opposition back in 2005, Salmond said: “The SNP’s proposals to establish an oil fund would ensure that our oil wealth is not squandered by the London government but is invested to ensure that Scotland and future generations benefit from this win on the natural lottery.

Last week he wrote to prime minister Gordon Brown demanding that Scotland gets a fair share of the extra £4 billion that is coming the Treasury’s way because of the high oil price. Salmond argued that Scotland is entitled to receive a proportion of this extra tax take, and suggests that 10% should be assigned to Holyrood. According to the Scottish government, such a share of the “windfall” could provide an extra £500 million to add to Scotland’s £30 billion budget.

Salmond writes: “The Chancellor is gathering in between £4bn and £5bn of North Sea revenues over and above his Budget estimate because of the soaring price. It cannot possibly be right that in this energy rich nation we are experiencing the pain of soaring fuel prices, with no direct gain from our North Sea revenues.”

Expect this proposal to receive short shrift from Brown and his short-termist chancellor Alistair Darling!

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