How North Sea oil has refueled Britain's economy
Britain's North Sea oil is ''a happy accident of geology,'' say three economists with the National Institute of Economic and Social Research. Britain's present economic situation and prospects, say F.J. Atkinson, S.J. Brooks, and Steven G.F. Hall, would have been ''a good deal worse'' without the flow of petroleum.Skip to next paragraph
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The oil has not turned the United Kingdom into a Persian Gulf sheikhdom, flooded with petrodollars. The value of oil and gas production reached $24.1 billion last year, or only about 4.75 percent of gross national product, the total output of goods and services in this country.
Nonetheless, the natural resource has proved a national boon. ''North Sea oil has helped us to repay overseas debts, abolish exchange controls, and reduce taxation and public borrowing,'' Sir Geoffrey Howe, outgoing chancellor of the Exchequer, has noted. ''In short, the benefits of North Sea oil have increased the level of disposable income and helped to lower interest rates and inflation. And these benefits can remain with us for some time to come. North Sea oil is playing a major role in setting the British economy on the path to prosperity and recovery.''
Despite the deep recession in Britain, those still working have seen a steady increase in their standard of living. They can thank North Sea oil and gas.
Moreover, the oil, together with floating exchange rates, has saved the British economy from its past pattern of stop-go economics. Often in the past, when an expansion picked up speed it would result in massive balance-of-payments deficits that would force the government to put on the economic brakes. The oil, by relieving Britain of the cost of imported oil and providing a sizable bonus from oil exports, eases that problem.
The three National Institute economists have calculated that oil production, after deducting the cost of imported materials and services and interest, profits, and dividends due abroad, amounted to a balance-of-payments saving last year of $16.4 billion, up from $14.1 billion the year before and only $2.2 billion in 1978.
But the earnings from oil have virtually peaked, they reckon.
Here are a few more facts about British North Sea oil:
* Britain's total oil production last year was 103.3 million tonnes (774 million barrels, or 2.1 million barrels a day). That compares with 89.4 million tonnes the year before.
Net exports (after the import of different kinds of crude needed for Britain's refineries) amounted to about 676,000 barrels a day. Thus Britain's exports are large enough to have a significant impact on world oil markets.
Britain has not joined Organization of Petroleum Exporting Countries. But according to the National Institute's Steven Hall, it is now ''cooperating nicely'' with OPEC in maintaining the current price of oil. It produces crude at full capacity, but does not undercut the world price for oil.
* The original recoverable reserves on the United Kingdom Continental Shelf are now estimated by the government at 2,000 to 4,200 million tonnes, of which 475 million tonnes have already been extracted.
Mr. Stevens guesses that actual reserves could prove to be five or six times that figure, and that the oil could last 70 or 80 years.
Moreover, he reckons there is considerable potential for onshore oil finds. Any oil found on land, however, belongs to the Crown. So there is ''very little incentive'' for private companies to drill onshore, Stevens says. Further, such drilling is often opposed by local governments.
''It's such a controversial issue, the government doesn't want to touch it,'' he says.
* Last year 111 wells - 68 exploration and 43 appraisal wells - were drilled, up from 48 and 26, respectively, in 1981. Nine significant discoveries were announced.
Although exploration activity in 1982 exceeded that of any year except 1975, the government in its March budget gave the oil industry new tax breaks to encourage development of smaller new North Sea fields. The tax reduction, Sir Geoffrey calculates, will save the industry more than $1.25 billion over the next four years.
The government gets about 53 percent of the value of oil production in tax revenues, up from 40 percent in 1980-81. Despite the tax cuts, government tax revenues should stabilize at about 60 percent of the value of oil production next year, according to the recent National Institute study. The tax system allows oil companies to recoup their high initial exploration and development costs quickly, but marginal tax rates are high once production is in full swing.
Corporate returns have on average been better than 20 percent.
* The cost of new oil production in the North Sea is about $23 a barrel, according to Mr. Stevens. So there is not much room for world oil prices to come down without sharply deterring British North Sea oil exploration and development.
One negative impact from North Sea oil has been its tendency to push up the price of the pound to levels many economists consider excessive. This has hurt the exports of other British industries and stimulated imports. But National Institute economists, in their recent article, calculate that if Britain had not had the benefit of its North Sea oil, manufacturing output would have been slightly lower still. Oil revenues stimulated domestic demand enough to more than offset the negative impact of higher exchange rates.
So, all in all, the British have good reason to be happy with their North Sea oil.
Next: Will the electronics industry boom?
FY 1976/'77 '78 '79 '80 '81 '82 '83 est Oil production volume (million tonnes) 16.6 41.4 59.6 79.6 81.4 90.5 105 value ($ billions) 1.4 3.8 5.0 10.7 14.9 19.9 22.9 Tax revenues ($ billions .12 .31 .78 3.6 5.9 10.0 12.1 average tax rate (percent) 9.0 8.0 16.0 40.0 50.0 53.0 Source: Economic Trends, National Institute of Economic and Social Research