Motorists might cheer falling pump prices but crude at $60 a barrel would hit Scotland’s economy hard, writes Peter Jones
WATCHING today’s tumbling oil prices vividly brings back memories of living in Aberdeen in the mid-1980s. After six years of Brent crude selling for around $30/barrel, prices halved to about $15/barrel. Almost overnight, “for sale” notices sprouted like weeds in residential neighbourhoods, companies cut back and unemployment rose. Could the same be about to happen again?
In Aberdeen last week to report on a meeting of oilmen and UK Treasury ministers, and asking what the mood in the city was, the reactions I got ranged from “nervous” to “panicking”.
It’s not surprising. Having had nearly four years of Brent crude looking comfortably and stably priced at about $110/barrel, it has now slid below $70 and could well fall further to $60. Nobody is banking on the price recovering any time soon.
The independence referendum has completely skewed public understanding of the importance of the oil industry to Scotland. All the debate was about how much tax revenues might flow from it, totally obscuring the fact that it is much more important to Scotland as a major employer and exporter of equipment and skills. Those jobs and exports are now in serious peril.
In passing, I can’t help pointing out that all the jeering from the SNP and its Yes people at Better Together for harping on about the risks to an independent Scotland of depending on volatile revenues has now been shown for what it was – empty idiotic sneering at hard political and economic realities.
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And the PR front put on by the industry that it would cope with independence? At last week’s meeting, when Malcolm Webb, chief executive of Oil and Gas UK referred to the uncertainty caused by the referendum having gone away, I heard one oilman mutter “thank God”.
Neither is it scaremongering to contend that a sustained period of $60 prices is a possibility. Until now, the oil majors have assumed a floor price of $80 in their planning. At the meeting, Glen Caley, head of Shell UK’s exploration and production, said he was now planning on the basis of $70, perhaps $60 enduring for one, maybe two years.
History says why that is realistic. There was some surprise that Opec, which controls about 40 per cent of world oil production, did not cut production in order to boost prices at its November meeting.
Saudi Arabia, which is the main Opec mover, may be recalling that it cut production substantially in the early 1980s in order to sustain the then $30 price (equivalent to $90-100 in today’s values). All that achieved was big investment elsewhere in the world, boosting production so much that it out-stripped Opec’s cuts and caused the price to tumble.
A better strategy for Opec is to let the price stay low, deterring investment while the world economy benefits from relatively low oil prices. That should serve to reduce supply and increase demand which will eventually push prices up again. It can take time – it wasn’t until 2005 that crude prices recovered to 1985 levels – but because of growth in China and India, the pattern of demand is different now and is likely to pick up more quickly.
Much of the recent supply growth has come from America where the growth in shale oil production has seen US production rise from 6.8 million barrels a day in 2008 to 10 million barrels a day in 2013. Oil at $60 would lead to bankruptcies among a lot of producers and investment vanishing.
Although shale wells dry up very quickly, sunk investment has to be recovered, so it would still be two years before production starts to fall.
Meanwhile Saudi Arabia, where production costs a mere $5-6/barrel, would still be sitting pretty and enjoying the discomfiture of ancient oil-producing rivals Iran and Russia, both heavily dependent on oil revenues, while it has £575 billion of wealth stashed away to keep the house of Saud in new private jets.
No sovereign wealth fund that an independent Scotland might have accumulated would be able to deal with the industry consequences of a prolonged bout of $60 oil. Vanishing oil revenues are the least of the problem; disappearing jobs are the real issue.
According to the industry trade body, some 36,000 people work for the oil producers, of whom some 26,000 work offshore. Most of these jobs will not be at any immediate risk. That is because there is a huge amount of embedded capital offshore which can only be earned back by continued production.
The problem comes in the North Sea supply chain where there are some 200,000 jobs plus about another 100,000 producing about £15bn worth of equipment and services which are exported worldwide. The earnings of these 300,000 people are also estimated to support another 112,000 jobs.
Just over half of these jobs are in Scotland, and half of these Scottish jobs are in north-east Scotland. That adds up to a question mark having been placed over about 200,000 jobs, 100,000 of them in Aberdeen and the surrounding area.
What threatens them is investment, global competition for which was described at the meeting as “intense”, drying up. In 1999, the Asian economic crisis caused oilfield investment to plunge by 20 per cent and during the 2008 financial crisis it dropped by 10 per cent.
Falling investment means less money being spent on equipment and services and falling sales, both to the UKCS and global markets. Some firms with cost-cutting techniques and machinery to sell will do well, but those that don’t will find it hard.
Sir Ian Wood, who knows the North Sea better than anyone, told the meeting the consequences of $70 oil could be “horrible” and some fields could close early.
Executives at the Aberdeen meeting were mildly comforted that UK ministers at last seemed to be listening to them, but stressed that much faster action to cut tax burdens is needed.
The Treasury is certainly open to a lot of criticism for its management of the offshore fiscal regime, but even if it did take swift loosening action now, that would only partially soften the blow of what is a global problem.
While Scotland’s motorists may cheer pump prices eventually sinking below £1 per litre, the economy they are driving around in is going to be distinctly wintry in more ways than just the weather.
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