- PM Sunak’s decision to re-open the North Sea is controversial
- Some claim this will not improve the UK’s energy “trilemma”
- I believe it is a net positive, perhaps strongly so
[Please note: This article is intended to serve as a counterpoint to the article published on Monday by my colleague James Allen, which was highly critical of the government’s recent decision to re-open the North Sea to new oil and gas projects.]
Over half a century ago, the UK government gave the green light to energy companies to develop en masse oil and gas fields in the North Sea. It took a few years for capacity to come online. However, by the 1980s, the UK was a net exporter of oil. By the mid-1990s, the UK was also a net exporter of gas.
UK energy policy, today, is officially referred to as solving for a “trilemma”: energy security, affordability and sustainability. North Sea development directly improved the former. As for affordability, that is less clear. Oil prices are set globally, not locally, and North Sea production was never large enough as a percentage of global output to have had a material impact on prices.
It did, however, provide a huge boon for the economy and government finances at a difficult time. Previously on the brink of a balance-of-payments crisis, without North Sea oil and gas, it is not at all clear that the British economy would have recovered as strongly as it did in the 1980s and beyond. Thatcher’s economic reforms might not have succeeded to the extent that they did. The country might have slipped ever further into a creeping socialism.
North Sea production peaked in the early 2000s and slowly trailed off, even as consumption rose. The UK, once again, became a net importer of both oil and gas.
Returning to the concept of the energy “trilemma”, clearly, the above North Sea development was not a “sustainable” solution to the UK’s energy needs. It did, however, buy the UK some 30 years of energy self-sufficiency and cushioned the gradual transition back to imports for many years thereafter.
Hindsight may be 20/20 but the decision to open up the North Sea was arguably one of the best government economic policy decisions of the 20th century. But that is now a long time ago.
Today, following decades of heavily taxpayer-subsidised investment into supposedly “green” and/or “renewable” sources of energy, the UK has become more reliant than ever on imported energy. This was not supposed to happen. However, chronic overpromising and underdelivering by alternative energy projects has resulted in an expensive grid that is still requiring substantial traditional and, now, imported energy to switch on at peak times — sometimes even off-peak.
The “trilemma”, as it were, has become much worse, rather than better. Government energy policy, so far this century, has been a failure in sharp contrast to what came before.
Hence, it is entirely understandable that the current government has decided to do an about-face and re-open the North Sea to new development projects. While there is no guarantee that these projects will produce the bumper results of the late-20th century, there is no reason not to allow businesses to try.
Drilling, extraction, transport, maintenance and all other technologies associated with offshore oil and gas production are far more advanced today. Not to mention far safer and cleaner. Yes, wells might need to be drilled in deeper waters, farther offshore, but deep-water technology was pioneered all the way back in the 1990s. It has become routine since, notwithstanding the notoriously badly-managed Deepwater Horizon project a decade ago.
Oil remains a global market… gas, somewhat less so. In either case, the UK makes up only about 4% of either. Even if the UK ramps up production, it is unrealistic that our market share will rise more than a few percent at most. The UK will remain a “price taker” rather than become a “price maker”. Domestic oil and gas prices may remain high or rise to even higher levels in future.
As a larger producer, however, the UK energy industry will generate more revenue, more jobs and more taxes for the government, things that will positively impact the overall economy at every level. This would be as true today as it was in the late-20th century, even if the order of magnitude might not be quite as great.
Net positive, however, is net positive. Allowing an abundant, local natural resource to be sensibly, safely exploited with proven, next-generation technology seems a no-brainer.
Whether it will be sustainable or not, ask yourself: had such reasoning been employed in the 1970s, would Britain have prospered anything like it did in the subsequent decades? Or would it have remained stuck amid high taxes, high interest rates, high inflation and widespread industrial action?
If you think that all sounds a bit like the way things are going today, you’re right. But it doesn’t need to be like that.
It is impossible to know just how large a potential North Sea energy windfall is out there. It’s probably not going to be on the same scale as the last time round. But it is certainly way above zero, especially given all the new technologies and existing support infrastructure that are readily available.
There is also no guarantee that the benefits of a renewed North Sea development push will not be squandered. Governments have a bad habit of doing such things.
In any case, it is a matter for policy to decide. Some might wish to see the proceeds used for further investment in renewables. As long as they actually deliver on their promises, that’s fine by me.
But whether it be in one’s personal, social or commercial life, we tend to act in ways that have been proven to produce positive results, rather than those that have proven not to.
Why shouldn’t the policies of our government be guided by the same principle?
Until next time,
Investment Director, Fortune & Freedom
PS We’re going to broadcast Eoin’s exclusive Trading Triggers workshop over four episodes, starting on 18 August, at 2pm. If you’re looking for a tried-and-tested approach, and one that has had great success in some very tough conditions, I strongly recommend you attend.
It’s free and I think you’ll learn a lot of valuable lessons.