MONEY A lesson in oil economics

NICHOLAS DAVENPORT

One of the most depressing features of the trade union establishment in this country is its appalling ignorance of the elementary principles of business life. They urge their policy of expansion on the Prime Minister at No 10 but they never seem to realise that in- dustrial expansion comes out of investment and that investment comes out of profits. Yet they have done their best (or worst) to eat in- to profits with their ever-increasing wage claims and to kill investment by making it unprofitable. In the labour-dominated period from 1964 to 1970 employment incomes in- creased their share of the national cake from 67.8 per cent to 72.1 per cent, while that taken by gross trading profits fell from 14.8 per cent to 9.7 per cent. For the first time for decades industrial investment is forecast ac- tually to fall this year. It is no use telling the businessmen to go to the capital market and raise the money for labour-saving equip- ment. With the present high cost of bor- rowing as well as of labour they would not be able to see a profit.

In case any trade union or labour member reads this column and is willing to be educated I propose to give a short lesson in business economics taking, as an example, the oil industry which at the moment is in serious economic trouble. Oil is a capital- intensive industry partly because its pro- duction costs are enormous and 'still rising, partly because consumption is increasing at the rate of 7 per cent per annum compound which means that every ten_ years. .the refineries, transport and marketing plant have to be doubled! In an inflationary period this upsets costs and profit margins.

Capital requirements are now rising more rapidly. because of the inflation, because the oil industry is being asked to combat pollu-

tion (which broadly means taking the lead out of the high octane petrol), and also because the countries in the Middle East and North Africa whence the big supplies of oil are derived have formed a trade union -OPEC (Organisation of Producing and Ex- porting Countries)—and have put up their prices. This is comparable with the cost-raising tactics of our own trade unions at home. Here our lesson in economics points a moral for these wage-inflationary times.

The arrangements made by the oil com- panies with their hosts governments in the Middle East and North Africa are ex- ceedingly complicated and becoming im- possible. They all agree upon a fictional 'posted price' for each field according to the gravity of the oil—the. real market price generally stands at a discount of some 10 per cent on a posted price of $2 per barrel—and then the companies pay half or more of their notional profits to the host government, the notional profit being the difference between the fictional 'posted price' and the costs of production, including therein the cost of the 12+ per cent royalty. The recent bitter dispute between the companies and the Mid- dle East governments was due to the governments pushing up the posted prices by 50 cents immediately (i.e. 20 per cent—with more to come) and enlarging the income tax grab from 50 per cent to 55 per cent. The Middle East governments threatened to cut off supplies if the oil companies did not agree. As the world ig dependent for 40 per cent of its supplies on the Middle East and North Africa the threat was a real one. Now the Libyan and Algerian governments have made the same threat if the companies do not agree to substantially higher `posted' prices based on the better quality of their

local oil and the shorter haul to the Euro- pean markets.

I have not got much sympathy with the oil companies in this ugly dispute because they allowed the 'posted' prices to remain fixed for too long. Not since the 'fifties had they been altered. The Shah was able to tell his Bac television audience with some truth that the great international oil companies have been cheating for years. This row will even- tually cost us consumers about one new pen- ny on each gallon of petrol we consume. What makes it all the more serious for the British consumer is that our import bill for oil, which is already near £700 million, will go up by £100 million. The six Arab states in the Gulf will secure an additional revenue of $1,200 million in 1971 rising to about $3,000 million in 1975. If this makes the mouth of the trade unionist water he should remember that oil is a fossil fuel and that its supply is exhaustible. The Arab governments know that they can hold us up to ransom for the time being—but not for ever. Alternative sources of oil will be found. Alternative sources of energy will be developed, but it will take time.

At the moment oil and natural gas account for 71 per cent of the world's energy re- quirements, coal for 25 per cent, hydro-elec- tricity for 3 per cent and nuclear power for only 1 per cent. In ten years' time nuclear energy will be close on 10 per cent. For fifty years perhaps we shall be dependent on oil and natural gas, and as the following table shows we look to the Middle East and Africa for 40 per cent of it.

World Production in Barrels per day (Thousands)

USA and Canada 12,130 .Venezuela and West. Hem. 5,150

Middle East 12,355 Africa 5,245

USSR and. East. Hem. 8,730

43,610 World Consumption in Barrels per day (Thousands)

USA and Canada 15,250

Other West. Hem. 2,600 W. Europe 11,340 Japan 3,290

USSR and East. Hem 10,070

42,550 The lessons of this study in applied economics may now be summarised. When costs of production are forced up by withholding supplies—in the case of British labour by strike action—prices must im- mediately be raised to maintain profits out of which new investment is .financed. In the case of oil, new investment is essential because oil fields are wasting assets. In the case of British labour new investment is not essential. Ford Motors, for example, can go elsewhere. Further, by shutting down in- vestment British labour becomes in excess supply while oil becomes in short supply.

So serious is the threat of an oil hold-up that we must redouble the effort to find sup- plies alternative to the Middle East and the Mediterranean. We have two chances in the North Sea and Alaska. To weigh up this technical question I am interviewing Dr Gaskell, the well-known geologist and scien- tific adviser to British Petroleum, whose opi- nions I hope to give next week.