Truss’ North Sea Drilling Plan Will Need to Prolong Cost of Living Crisis to Buoy Big Oil Profits
The Government’s own data suggests that Britain’s fossil fuel lobbies want to use the cost of living crisis to keep themselves afloat, writes Nafeez Ahmed
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Shortly before her victory in the Conservative leadership contest, Liz Truss announced her plans to grant up to 130 licenses for new oil and gas drilling in the North Sea to achieve long-term British energy security.
But the plan illustrates everything that is wrong with the mindset of the governing party: economic illiteracy bound up with rampant cronyism.
Gas power is now nine times more expensive than solar and wind – and it’s only set to become more scarce and expensive. But the Government’s plan is to lock Britons into dependence on North Sea oil and gas production which, all its own data confirms, is in terminal decline.
Data published earlier this year by the Government’s Office for Budget Responsibility (OBR) demonstrates the lack thought in Truss’ proposal.
“Since 2008-09 UK oil and gas revenues fell from £10.6 billion (0.7% of GDP) to £0.6 billion (0.03% of GDP) in 2019-20”, reported the OBR in March.
“The fall in receipts was largely driven by falling production and higher tax-deductible expenditure. The rates of petroleum revenue tax and the supplementary charge were also cut substantially.”
The Government’s own data therefore throws cold water on the idea that North Sea oil resources offer a pathway to energy security. With production having peaked around 1999, it has continuously declined over the past two decades – a trend that is unlikely to be significantly ameliorated with more investment and drilling.
Thus far, the Government has framed the North Sea oil issue as a battle between securing British energy self-sufficiency and jobs and climate activists who see continued oil production as a threat.
Yet the biggest problem with the Truss plan is that it relies on the self-serving demands from oil and gas giants like Shell and BP, and ignores the self-defeating economics of oil dependence.
While the fossil fuel dinosaurs will temporarily reap huge profits from the plan, energy prices would remain high as Britain becomes forced to depend on dwindling supplies guaranteed to become more costly and scarce over the next decade.
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These dynamics have been captured in the concept of ‘Energy Return On Investment’ (EROI): the more energy we use just to extract energy from natural resources, the less surplus ‘net’ energy remains for society and the economy. As a result, once an oil reserve’s cheapest and most easy resources are used up, more expensive measures are needed to continue getting out the rest of the difficult oil.
While that oil exists in abundance, the more energy we need to keep getting it out, the more uneconomical it becomes. Production inevitably declines, and oil companies end up in a self-cannibalising feedback loop. As profits decline, so does new investment in new production, and the process accelerates. That is why I’ve called this the age of ‘crappy oil’.
Oil lobbies have responded to these diminishing returns by screaming for more government subsidies to keep them afloat, with the promise that new investment will allow them to ramp up production. But this ignores the real problem – that throwing money at a declining oil reserve doesn’t make it more productive.
At best, it might squeeze out a quick, temporary shot of oil at greater cost to taxpayers – and huge profits for oil lobbies – but it won’t change the fundamental economic dynamics at play that culminates in ongoing decline.
Those dynamics boil down to one unassailable fact: North Sea oil and gas is in its twilight and will make no meaningful contribution to long-term British energy security. And the Government knows it.
Another OBR graph updated in May reveals how desperate the oil industry is to exploit this moment.
Oil and gas revenues from the North Sea have plummeted catastrophically from a peak of about £10 billion in 2008 to about £0.6 billion today. But the OBR’s forecast (illustrated with the blue line) recognises how the gas crisis is expected to lead to a huge jump.
The gas crisis has, in other words, offered a welcome respite, leading to a sudden spike in fossil fuel revenues which the Government expects will last for about a year before rapidly declining.
So fossil fuel lobbies are simply trying to exploit the gas crisis to postpone their inevitable demise and reap huge profits along the way.
But this cannot change the fact that, over the next two decades, the overall trajectory of North Sea oil and gas production is trending downwards.
Crude oil production is expected to collapse by nearly half, from 37.3 to below 20 million metric tonnes by 2033. As for gas, it’s expected to “continue in a state of managed decline”, according to Fitch Solutions Country Risk and Industry Research, which concludes that “over the long-term, we forecast UK gas production to decline at 9% year-on-year due to low exploratory drilling levels and high natural decline rates”.
Even with more investment and drilling, this outlook will not be significantly improved. And the North Sea bonanza is all premised on one thing: high oil and gas prices.
Because the North Sea is so expensive to operate in, as the IMF has long pointed out, extortionately high prices are essential to make continued production economically feasible. But for rocketing prices to stay high, the gas crisis must continue. This means that Truss’ gas gamble cannot alleviate the cost of living crisis. In fact, the plan requires the energy-driven cost of living crisis to continue. Without it, Big Oil’s North Sea gambit could not happen.
So if our new Prime Minister’s plan proceeds, it will seal Britain’s over-dependence on expensive and dwindling oil and gas supplies which, just to keep going, will demand billions of increasing state hand-outs to Big Oil – guaranteeing elevated energy prices for the public and exacerbating recession.
It is difficult to avoid the conclusion that the Truss energy plan is not actually designed to alleviate the cost of living crisis, but aims to do the very opposite – to prolong the energy crisis and prolong the pain to British consumers, in the interests of oil and gas lobbies which are already reaping massive profits at the expense of ordinary Britons.
Liz Truss was contacted for comment.