The connection between economic activity and the oil price is a fairly obvious one. As economic activity declines, as it is now, then so will energy demand – and the cost of a barrel will follow it down.
As I’m writing this, I actually have one eye on the television in my office, which is permanently tuned to Bloomberg, and I see that Brent and West Texas Intermediate have fallen below $50 a barrel.
This tells me two things. Firstly, today at least, the market has a very gloomy view of global economic prospects. Secondly, nobody should now think that the North Sea will remain immune to a general recession and that therefore nothing needs to be done.
What I’m really worried about are the smaller companies – those suppliers of both services and hardware that the industry depends on and which make up a large percentage of companies in the overall sector.
I would also remind you that it’s generally the small companies that tend to be the most technically innovative.
As we have heard from elsewhere, and in other sectors, a lot of small companies are now finding it extremely difficult to obtain bank loans to support their general operations. And, as we know, the Government is extremely irritated that the banks have not yet resumed “normal lending”.
That said, I’m somewhat surprised by the Government’s naivety in believing the banks would just do as the Government wanted. Well actually, maybe I shouldn’t be – surprised, that is.
However, it is therefore quite possible that a small firm in the oil&gas supply chain, having been awarded a contract, might now be unable to fund it.
Although it has always been the case that the banks have refused to help fund contracts where they either don’t understand what they’re all about or have genuine financial concerns, the situation now is such that even funding relatively “routine” contracts is very difficult.
What we don’t want to see is a bunch of innovative small Scottish companies having to agree to be bought out, usually by large and overseas companies, simply because the banks won’t play the game, or having to close their doors due to avoidable cash-flow problems.
It seems to me, therefore, that larger companies – particularly the major oil companies, who are reasonably cash rich at the moment – should seriously consider temporarily (hopefully) acting as bankers to the small-company sector.
This would not be a particularly difficult thing for them to do, provided that they kept the lawyers and bean counters under control and that they would be prepared to work with other companies and agencies.
I can think of a number of ways this could be done, including the larger company simply providing a guarantee to the bank involved for a percentage of the funding required which is large enough to provide a safety belt the bank could live with.
This is something that probably needs to be looked at sooner rather than later and I would urge organisations, including Oil & Gas UK, to discuss this amongst their members.
Although companies involved in the North Sea generally should now be thinking hard about how to deal with a possibly prolonged downturn, the Government should be really worried.
Based on a price of around $50 throughout 2009, the Treasury tax take could drop from £10billion to less than £4billion. That’s a fall of about £6billion for politicians who can’t add up.
Of course, some will argue that the impact on public expenditure due to lower inflation resulting from a lower oil price will substantially offset that £6billion and that the reduction in the cost of oil products – especially fuel – will benefit the economy overall.
However, it is critically important to the economy that both exploration and field development in the North Sea, and indeed globally, continue at least at the current pace if we are to avoid an oil-price overshoot when economic recovery begins and energy demand picks up.
How then to ensure this at a time of real uncertainty?
The answer is, in part, fairly straightforward. To use one of the Government’s most worn phrases, what we need is a hefty dose of “fiscal stimulation”.
Billions of pounds of taxpayers’ money is being used to save the banking system, even though it will still result in possibly tens of thousands of job losses. So taxpayers might feel they were actually getting some real value by forgoing some of the tax from North Sea oil&gas operations, especially if it resulted in saving jobs and maintaining and prolonging UK domestic output.
Of course some will say that this is, in fact, a wonderful opportunity to switch away from oil&gas.
Others will say that, given that the price of oil, in particular, is coming down, alternative energy technologies have become uneconomic, and will point to ethanol companies in the US going bust as evidence.
The doomsters are, of course, wrong – but then they can point to a complete lack of support from the Treasury which, having sold £54million worth of carbon permits, has now admitted that none of that money will be used to support clean-technology projects.
That means carbon permits add up to just another stealth tax, and the size of this tax take will rise to more than £1billion in the next few years.
Commenting on this, the energy minister chap – whose name I still can’t remember – said something along the lines of, “Today’s first auction demonstrates continued UK leadership in reducing carbon emissions as part of the fight against dangerous climate change, blah de blah de blah. We need this money to pay for the loans and capital we’ve given to the banks because they’re much more important than those nasty, smelly little companies that want to build energy technologies. We let others do that sort of thing. If you don’t like it then move to Germany or Norway”.
Well that’s what it seems like to me. Merry Christmas.