The oil brink
Nicholas Davenport
The popular view of our unending economic crisis was well expressed by Sir John Davis at the advertising conference last week. This country, he said, is poised on the brink but it is far from clear which particular brink we are standing on. The obvious, the immediate one is the balance of payments brink on to which we were pushed by the quadrupling of the price of oil. The extra cost of our oil imports in 1974 will be about $4,000 million, bringing our payments deficit this year to about E3,000 million.
Italy has already been pushed over the payments brink by this political oil hold-up. Her short term credits exhausted, her government has just ordered importers to deposit a 50 per cent surcharge with the Bank of Italy over the next six months — raw materials excepted. Article 109 of the Treaty of Rome may allow a member to impose import surcharges in an emergency but it is difficult to see how the European Common Market can survive if each member is left to -fight for itself with import surcharges and floating exchanges When the oil exporting-countries impose an extra burden of $60,000 million on the Community. Italy will not find it so easy to borrow on the international capital market as Great Britain which has a huge potential asset in North Sea oil. Nor has it a government which can make a "social contract" with its labour force, whatever that is worth. .
It is therefore important, as my colleague Skinflint remarked, that the British Government should make it clear to the EEC that the oil from the North Sea flows to the betterment of our national balance of payments and our borrowing powers. Lord Balogh, the energy minister turned sheikh of North Sea oil, has not yet declared his policy in full but I did not like what Dr Strang, his Parliamentary Under-Secretary of State at the Department of Energy, said last week at some conference. He intimated that the Government would not act as a sleeping partner but would use a majority interest to control the future development of the oil fields. If he was thinking of nationalising the dozens of companies and partnerships spread over hundreds of small claims I am sure this would be fatal. The chairman of Shell, Mr Frank McFadzean, has described nationalisation as a lunacy which would push back large-scale production from these difficult and costly off-shore fields into the distant future. If the Government wanted more money, he added, it could get it by some new tax. But the Government, said Dr Strang, rejects this approach. So what is in Sheikh Balogh's mind?
Obviously the old set-up will have to be changed. The government began by taking the conventional oil royalty of 121 per cent at well-head and charging the current corporation taxes. As the International oil companies can set off tax charged in one country against the tax charged in another it could mean that they might pay no British corporation tax (now 52 per cent) at all. So there will have to be a special North Sea oil tax on the oil flow at the platform collecting point. That requires no nationalisation. But if the Government starts tearing up the licences which previous governments have issued to the speculators who risked millions drilling under the sea-bed in forty feet of storm-tossed water — how noble speculation becomes in some cases! — it will convince the oil industry that the British Government is as little to be trusted as the Arab sheikhdoms.
Consider what the Arabs have done. They first invite the big international oil groups to sink billions of dollars in drilling and developing their prolific oil fields on a 12-1 per cent royalty basis and then take away by tax some 50 per cent of the profits made by the local producing companies. (The profits are the difference between production costs plus royalties and selling prices at the 'posted' wellhead price.) Now they demand participation in the local companies, starting at 25 per cent and raising it to 60 per cent in the case of Kuwait. They have not even told the oil groups what price they will have to pay for the government oil which comes from its participation, although they have indicated that it will be 93 per cent of the posted price. The chairman of British Petroleum, Sir Eric Drake, has just told his shareholders at the annual meeting that their companies are not now fully recovering the increased costs they expect to have to pay. They have been trading at a loss, in most of the main markets in
Europe where, after a mild winter and the building up of stocks, prices have weakened. He estimated that the current cost of crude oil in the Middle East was almost $9.5 a barrel instead of the frequently quoted figure of $7 a barrel.
Here I must say a good word for the international oil groups. They have lately been blackguarded as profiteers because their 1973 profits more than doubled. What else would you expect by comparison with the appalling 1972 results when you not only have currency profits but have to write up your stocks on the trading account to the now quadrupled price of oil? An EEC commissioner actually accused the oil companies of manipulating the hold-up of supplies to their own advantage and avoiding taxes. The Shell chairman replied that if the Royal Dutch-Shell group was trying to evade taxes it was not very good at it seeing that it had made provision last year for the payment of £1,160 million in income taxes.
I feel sorry for these oil tycoons. How mightily have they fallen from their former high estate! They were once the world suppliers of the most valuable. source of energy; they could dictate the price and control the markets. They have now been reduced by the Arab oil sheikhs to the lowly position of middlemen. They have merely to collect the crude oil at the wells and sell it, after refining, at prices fixed by their Arabian overlords. The lat
STphecetator May 11, 1974
ter are now proposing to build refineries in their home lands, so that the international oil groups will eventually be denied some refining profits. No wonder Shell is going into coal and nuclear power.
Coming back to the North Sea, we need the international oil groups' money and technical skill in developing these difficult oil fields under the sea. The Shell chairman has pointed out that the production investment for a prolific Middle East field is £100 per daily barrel: for the North Sea it is between £1,200 and £1,500 Per daily barrel. Allowing for price inflation the real return on Shell's assets last year was only 9 Per cent, which is quite inadequate, and the profit margin on petrol only averaged three-quarters of a penny. The Government must not frighten the big groups off by stupid nationalisation threats. Is Sheikh Balogh proposing to set up a national oil company to buy in sterling the North Sea oil at the market price and sell what remains after home consumption in dollars to the international oil middlemen — after a great bargaining conference over the respective prices?
I would remind him of an interesting piece of history. In 1950 the then Labour government abolished petrol rationing on the acceptance of a Standard Oil offer to supply additional petrol for sterling. His predecessors in office were wise enough to play with the great international oil groups and not antagonise them. I advise him to do the same.
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