Colonel Drake developed deep oil in Pennsylvania in 1859 and changed the future. The energy released by easily available petroleum powered the modern world. What is less well known is that the original Drake well closed a few years later after the price of oil collapsed following his discovery.
In the years before Drake’s discovery, whale oil for lamps and heating had soared to $100 a barrel as a result of scarcity of whales due to overfishing. However, within a few days of starting up, the Drake well produced as many barrels of oil as a whaling ship could gather on a four-year voyage. Many other wells were quickly started and the price of oil plunged.
The Drake story provides a timely reminder that oil price volatility is nothing new. These sharp fluctuations are as old as the industry itself. Around half of the 200 countries in the world produce some oil or gas. However, only 20 or so are in the exclusive one million barrels a day club where Scotland hovers at the present moment.
In more recent times oil has become no less volatile. The first oil price crisis of the early ’70s quintupled the price of oil to $15 in nominal terms or around $50 dollars in today’s prices.
The second 10 years later took oil prices in today’s terms to more than $100.
However by the mid 1980s the real price of oil was only a quarter of that and many people were forecasting the end of the North Sea. Of course the price recovered but that was as nothing to the falls of 1998 when oil hit $15 and the Economist magazine was confidently predicting single figure oil for the foreseeable future. In fact within 18 months it was back over $50 and within 10 years it reached an all time high of more than $140.
The 2008 peak was followed within a year by a trough of $45 and then a sharp recovery to well over $100 where things remained until the current price collapse which started 18 months ago.
This savage bear market in oil is based on a number of specific aspects of oil supply and demand but also by the general deflation across commodities. Stock markets have followed, with the decline spreading across virtually all sectors. The mighty Apple, for example, has lost almost one third of its equity value over the last six months.
There are very good reasons why no one should be celebrating the oil price fall as the Prime Minister seemed to do in the House of Commons last week. Cameron called the oil price collapse “basically good for the British economy”.
Apart from the crucial aspect that thousands of people are losing their jobs, there is the impact on the wider economy to consider. One thing oil stocks and Apple stocks have in common is that they are the anchor of many pension funds.
History tells us is that the price falls are not permanent. Oil prices recover as surely as night follows day.
The task is to secure as much as possible of the industry and jobs in these tough times to ensure that it survives to prosper when prices pick up.
Among the many things that Scotland has developed over 40 years in the industry is unrivalled academic experience on oil development policies, not least in Aberdeen and Robert Gordon universities. In Professor Alex Kemp we have not only the official historian of the North Sea but someone with an unrivalled database of North Sea fields.
Of course the Scottish Government and local authorities should do all they can with capital investment and assistance for workers. However the real task is to incentivise development and that responsibility lies squarely with the UK Treasury. Kemp’s findings point the way towards the March Budget and a positive agenda for oil jobs.
The Treasury should introduce exploration credits. When oil prices are at rock bottom it is the best time to explore because rig rates are also low.
This could also be done for allowances against supplementary charge. Currently only drilling success can be offset. But success cannot be guaranteed. Allowing all wells to be offset would help underpin the confidence to drill.
Similarly enhanced oil recovery needs support. Allowing polymers and other materials which are needed to inject into oil wells to enhance recovery to be offset against taxation would place the correct emphasis on sustaining production into the future.
Finally, the more energy diversification the better. Delayed projects such as the Aberdeen offshore wind demonstrator and cancelled projects such as the Peterhead carbon capture power station are vital investments.
They should be revived to broaden energy base and skills of the north east of Scotland to make us not just a world oil and gas capital but an energy one for the next generation.
In the last 40 years North Sea oil has generated over £300 billion for successive Chancellors of the Exchequer. Should this not be payback time for North Sea workers?