Oil Market Report April, 2013

Another month and another world leader from an oil producing country passes away. One, a fearsome autocrat, unable to countenance dissent in any form and the other….Hugo Chavez! The death of Margaret Thatcher has been greeted with an impassioned national debate on her legacy and achievements, but good sense says we should steer clear of such polemics. Instead, we will look at how oil helped shape her time in power.

To be a good Prime Minister, it is often said you need to be lucky and although there was nothing “lucky” about Britain in 1979 (when Thatcher came to power), there was one auspicious event in the wings that boded well – North Sea Oil. By 1980, production was beginning to boom and this splurge in oil revenues rapidly helped the Thatcher Administration address the UK’s chronic balance of payments problem – something that had besieged successive governments since the War. Between 1980 and 1990, the Government received oil royalties of £166bn (at today’s value, circa $300bn) and these revenues were largely generated by so-called “super-taxes” on oil production. Indeed, far from taking a “laissez-faire” / free-market approach to North Sea Oil (which characterised her treatment of other industries), Thatcher’s approach to the oil industry was more in line with a traditional socialist model of “tax and spend”. At one point the UK’s Petroleum Revenue Tax was at 90% (yes, you read that correctly!) and the spending…? Well much of that was on dole money, as Thatcher (wo)manhandled the UK to a free-market economy and unemployment rose from 1.25m to 3m by 1984.

Thatcher herself never doubted the importance of oil. She not only saw the oil embargoes of 1973 as one of the main factors behind the Tory election defeat in 1973 but many years later, she encouraged British investment into Russian oil fields. – as a way of boosting UK interests and accelerating the flow of foreign currency to her new ally, Mikhail Gorbachev. However, as with all things “Thatcher”, it is the Miner’s Strike that dominates the period and with oil, it is no different.

Over the years, much has been made of Thatcher’s cunning tactics from 1981 to 1984, when having stock-piled coal to record levels (70m tonnes), she felt ready to go head-to-head with Scargill and his miners. At the same time, an equal amount has been made of the reckless Scargill, who took his colleagues on strike when the odds against them were seemingly stacked as high as the spare coal at the power stations. But the truth is that neither Thatcher nor Scargill could have predicted just how much oil would be flowing from the North Sea by 1984. Not only were the revenues piling in for the Government, but the availability of oil meant that electricity generation from oil could increase from below 10% in the late 1970’s to almost 35% at the height of the Miner’s Strike (see graph below, clearly showing electricity from oil replacing coal at around the time of the Miner’s Strike). UK coal consumption during the strike reduced from 120m tonnes per annum to 90m tonnes and this shortfall was met almost entirely by oil and nuclear – the 2 ace cards of Government – meaning that the lights stayed on and the miners were defeated.

If we are to criticise Thatcher from an oil perspective, then her failure (along with every other Prime Minister since) to harness the continued oil wind-falls into anything more than short-term financial and political capital, clearly stands out. Across the North Sea, the Norwegians saw the long-term value of oil production and set up what has now become the world’s largest Sovereign Wealth Fund ($700bn) and Britain’s failure to set up anything even remotely close to this, must be viewed as an “epic fail”. Even if the British National Oil Corporation (privatised in 1982) had maintained a 10% stake in North Sea Production, annual oil revenues into the Exchequer would today be 25% higher than they are. And even if no stake had been maintained, but say 10% of North Sea Revenue had been ring-fenced into a Sovereign Fund since 1985, then the UK would now have a fund sitting with between $35 and $40bn (depending on interest rates). And if we had gone the whole hog and maintained a fully nationalised oil industry (a la Statoil in Norway), then each year the UK would generate $25bn annually ($17bn pa more than it currently raises) and we would have a fund in excess of $250bn – possibly as high as $500bn, depending on how often each Government dipped their fingers into the honey pot.

So the comparison between Thatcher and Chavez at the start of this piece was perhaps not so fatuous after all. Both based their Government actions on ideology and both relied on the windfall of oil revenue to achieve their ideological aims. Both were lucky in their timing – Thatcher because she came to power when UK oil production started to boom and Chavez because his tenure coincided with a world-wide price boom. More damningly, neither did a great deal in securing their country’s riches for future generations.