3 March 2015

Now Gordon Brown wants UK taxpayers to bail out big oil


Daniel Yurgin’s magnificent, definitive global history of oil presents the industry in proper perspective. Despite “The Prize” being a giant door-stopper of a book, it somehow rattles ‎along mixing thrilling narrative and colourful personalities with science, economics and social history.‎ By the time you get to the end of Yurgin’s masterwork, the 20th century makes a lot more sense. Oil, oil, oil. That is what fuels prosperity and growth, rockets global trade, rescues lucky dictators and shapes the outcome of wars.

Most of all, the reader is ‎left with a sense that, alongside financial services in the good times, this – oil – has been the ultimate money-making machine since the late 19th century. In this story, vast fortunes are created, lost and sometimes remade. Clever entrepreneurs and chemists go head to head with rampant scoundrels. Enormous corporations are created. Demand for workers soars and falls in line with the price. The competition – for top talent – is intense, and the business, particularly in dangerous parts of the world, is risky but can be highly profitable. Oil is a tough old trade that has created epic amounts of wealth.

This is, to put it mildly, not a weak industry in desperate need of assistance from taxpayers.

But of course, that is just what Britain’s former Prime minister Gordon Brown has suggested. ‎Brown, who in his own words “saved the world” when he bailed out megabanks during the financial crisis, now wants to begin something similar in the oil industry to alleviate production problems in Britain’s North Sea. The dramatic fall in the oil price below $50 a barrel last year took the industry by surprise. Smaller profits mean less money for investment in existing and new oil fields, which threatens jobs, which means – according to Brown – that taxpayers should intervene to help.

In a speech in Scotland on Monday he called for government loans, “public-private partnerships” and last resort debt finance to keep fields open. The BBC has a full report.

This is classic Brown. He is always so generous with other people’s money.

Just when consumers, the people who ultimately pay for all that oil, petrol and gas, have got a lucky break from falling oil prices after years of economic misery in the UK, here comes Gordon Brown wanting Britons to give money back to big oil companies via the government. Incidentally, that spell of economic misery resulted from someone (Gordon Brown) running the economy in a crazed fashion – with banks at 450% of UK GDP, endless cheap money leading to ballooning private debt, and botched regulation focussed on consumer micro-management rather than big picture questions of capital, liquidity and the safety of institutions. That resulted in Britain having one of the worst experiences in the aftermath of the global financial crisis. It is not that Brown personally caused the financial crisis – although he was part of an elite of policy markers who made catastrophic errors of judgement – but what he should really be blamed for is leaving the country badly exposed when the downturn came, as they always do come eventually. Instead, he arrogantly proclaimed that it was okay to run at full throttle because he had achieved the end of the business cycle or the “end of boom and bust”.

Anyway, I digress. It is not hard to imagine the perverse incentives that would be created by more government interference in the oil and gas industry. For  a start it presumes that everyone involved is telling the entire truth, when it is possible they are not. Imagine a clever finance director looking to save money for shareholders. His red pen is about to score a line through the name of a project that his or her firm was thinking about embarking on or extending for a few more years. Alternatively, perhaps it is essential maintenance that he was going to approve but he can now say it is in doubt because he knows that some of the costs, in either scaling back or making essential changes, can now be passed on to the government. Next, the government sends some officials to meet the CEO and everyone agrees that it is vital that something must be done with government, for which read taxpayer, money. Pictures are taken for the newspapers. The trade unions welcome the deal that protects producer interests. And if anyone checks on the status of the mothballed project or upgrade five years hence? Hell, the government will probably have changed (certainly the minister will have) and the oil firm’s finance director and CEO will have moved on too. But the taxpayer won’t have gone anywhere. The taxpayer will have paid the bill.

That is Brownite, big government, corporatist micro-management in action, and by the time the taxpayer realises he has been fleeced, Brown will be off making more speeches on his plan to overhaul another industry or do yet more damage to the battered UK constitution.

But while it is easy to mock Brown wittering on about the latest of his grand schemes for more government, the danger is that something like what he proposes will be adopted by the current Conservative-led government or any new government after the election in May. There is sheer terror in the UK Labour party of the Scottish Nationalist surge, which could cost Labour many of its seats in its Scottish heartlands, making a Labour government at Westminster untenable. This means Labour will agree to anything Scottish, with taxpayers money, if the party thinks it will save a few seats.

The Tories are more sceptical and Chancellor George Osborne keeps pushing responsibility back onto the devolved Nationalist government in Edinburgh, which suddenly would rather London took charge. However, there is a UK Budget coming up and the temptation could be for the tactically minded Osborne to outflank Labour with a big scheme to rescue the North Sea.

He should resist that temptation, beyond perhaps simplifying the tax regime.

This is rough, especially on people working at the sharp-end of big oil. But it is an industry in which it is widely understood that the price of oil is what really counts. If it is economic – potentially profitable, I mean – to get the stuff out of the ground, someone will either find a way or go bust spending their investors’ money trying. There is no requirement for the taxpayer to turn up when prices fall and suddenly pretend to be an expert investor in one of the toughest industries on earth.

‎Iain Martin is Editor of CapX.