In shale, Britain has a second chance to mend its fortunes

January 17, 2014 8:09 pm

In shale, Britain has a second chance to mend its fortunes

By Misha Glenny

Profits should be invested for the nation, not frittered, writes Misha Glenny

Imagine a country where government welfare payments are generous and not under attack. A utopian kingdom in which all books are guaranteed to sell at least 1,000 copies because the state believes that every library – none of which are closing – should bring together the entire cultural output of the land. When its citizens venture abroad they are welcomed and loved, for they spend billions on aid for countries less fortunate than their own. Yet, despite all this opulence and generosity, their government owes a negligible amount of debt.To Thatcher’s children, this is a preposterous fantasy – or at any rate an unattainable one. Yet such a utopia exists barely 300 miles from British shores. It could have existed on this side of the North Sea as well. But whereas the Norwegians decided in 1990 to husband the exceptional revenues derived from their North Sea oil windfall, Britons decided to fritter theirs away in a binge of tax cuts and government spending. Compare the fortunes of the two countries, and it becomes clear that the British way was a tragic waste.

This was the week in which David Cameron, the prime minister who himself came of age in Thatcher’s Britain, announced that his government was “going all out for shale”. The bounty will be modest compared with that of North Sea oil. Still, if the government succeeds in opening the spigot, the country will have another opportunity to alleviate its economic woes. Second chances are rare. We cannot afford to let this one slip through our fingers.

Countries that grow rich from treasures buried beneath their soil usually end up with unbalanced economies, crimping their prospects in the long run. Economists point to the case of the Netherlands, which suffered a decline in its manufacturing industry after natural gas was discovered there in 1959.

Norway provides the model, not perfect but close to it, of how to turn this curse into a blessing. The establishment of an oil fund 24 years ago was not always straightforward but its passage through the Storting indicated that the Norwegians have succeeded where most democracies fail. They have learnt from history and placed their country’s long-term economic and social interests above parochial political concerns.

The Norwegians were aware of the “Dutch disease”. They understood that the way they managed their oil revenues would have an immense impact on their country’s future. Nonetheless, they disagreed on how it should be spent. One powerful lobby wanted to see the extra cash channelled directly into Norway in the form of construction projects and windfall handouts to citizens.

A second group argued that this would be unwise. They feared that oil proceeds would be too large for the local economy to absorb without stoking inflation. They also fretted that if politicians were entrusted with the task of disbursing the funds at home, they would prove incompetent or worse.

In the end, the second group won. Profits from the North Sea and the government’s 67 per cent stake in Statoil, the oil company, are channelled into a sovereign wealth fundthat invests them abroad. Each year, the government is allowed to siphon up to 4 per cent of the fund’s value into its current budget. The rest is invested for the future.

Norway’s success in channelling its resource wealth to serve the public good is one of the wonders of the modern world. It helps provide money for government initiatives through which a country of barely 5m people takes the lead in aid initiatives across the developing world. I have seen clean and numerous toilets in a Cape Town township, work projects in a Mumbai slum and water treatment programmes in Rio’s favelas – all funded in generous measure by Norway. The fund has also shielded Norwegians from the worst effects of the economic crisis, helping to sustain a welfare system that is beyond comparison with the rest of Europe.

It is a model that Britain should follow if its hopes of a shale windfall are realised – hopes that have been raised by the American shale boom. In the space of a decade, US production of natural gas has increased by a quarter. Last week BP predicted that the world’s largest oil consumer will be entirely self-sufficient in energy by 2035. It will become a net exporter of gas within four years.

The UK government sees similar potential in the country’s untapped reserves. Britain is more dependent on gas imports than any other EU country. Domestic production is declining. Shale exploitation would make us less reliant on fickle foreign suppliers. It would also create jobs, and a welcome source of revenue.

Yet significant obstacles will confront any attempt to recreate America’s shale bonanza in the small and densely populated British Isles. Onshore oil production cannot be confined to a remote wilderness that is beyond sight. Many Britons worry about the risk of doing lasting damage to the natural environment.

There are serious concerns about fracking, the process of breaking shale rocks to release gas. One is that injecting fluid into the ground at high pressure could upset the balance of forces near the earth’s faultlines, causing earthquakes. Another is that chemicals used in the process could contaminate groundwater.

For now, the government should concentrate on making sure these fears are not realised. It cannot afford to take any chances. No amount of material wealth could compensate Britain for the loss of its natural heritage.

But if these difficulties can be overcome and large-scale extraction begins, the government will confront the question of what to do with the spoils. Margaret Thatcher’s use of North Sea oil revenues to fund short-term tax cuts and government spending undoubtedly contributed to her popularity. “[H]er arrival in Downing Street coincided with North Sea oil,” observed Tony Blair in 1987, adding that “the importance of this windfall to the government’s political survival is incalculable”.

Yet in the long run it has proved tragically shortsighted. In Thatcher’s defence, the Norwegian model had not yet been proved. If Mr Cameron and his successors repeat her mistake, they will not so easily be forgiven for squandering Britain’s shale bounty.