British Oil: The Myth of Independence
Author(s): Lawrence Freedman
Source: The World Today, Vol. 34, No. 8 (Aug., 1978), pp. 287-295
Published by: Royal Institute of International Affairs
Stable URL: http://www.jstor.org/stable/40395062
Accessed: 07-05-2016 05:54 UTC
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
http://about.jstor.org/terms
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted
digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about
JSTOR, please contact support@jstor.org.
Royal Institute of International Affairs is collaborating with JSTOR to digitize, preserve and extend
access to The World Today
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
British oil : the myth of independence
LAWRENCE FREEDMAN
lIn thinking of ways and means to enjoy the feast to come, it is
important to keep in mind the famine to follow'
The purpose of this article is to raise some issues concerning the impact
of North Sea oil on Britain's external relations, a matter somewhat less
discussed than the impact on domestic economic management. More
specifically, the aim is to examine a common presumption that access to
substantial indigenous oil and gas supplies and the consequent economic
benefits will strengthen Britain's international position.
The benefits of North Sea fuels to the British economy are now being
put into perspective. The effects are by no means trivial. According to
Government figures, by the mid-1980s the help to the balance of payments will be some £8 billion, with about half that amount going to the
Government as extra revenue. But for an economy the size of Britain's
these figures only represent a few percentage points of GNP. However
wisely the extra income is spent it will not create the conditions for an
economic 'miracle' in Britain.1 It cannot compensate for weak performances by the rest of British industry or for slow growth in international
markets. In what promises to be a difficult period for all members of the
Organization for Economic Co-operation and Development (OECD),
Britain may notice an improvement in its relative position while still
failing to achieve the high growth rates that have proved so elusive in
the past. Furthermore, the benefits will be most marked during the 1980s,
as the level of production will steadily decline in the following decade.
In thinking of ways and means to enjoy the feast to come, it is important
to keep in mind the famine to follow.
If Britain's economy can be strengthened, its international standing
will no doubt improve. It will no longer always be the patient at gatherings
of bankers and finance ministers nor the first to blush when the hat is
passed round to fund some international initiative. The corollary of this
1 For a full discussion of the economic impact, see Sheila Page, 'The value and
distribution of North Sea oil and gas, 1970-1985', National Institute Economic
Review t No. 82, November 1977.
The author is Research Fellow at the Royal Institute of International Affairs.
This article is based on a paper first prepared in connexion with Chatham House's
current project on 'British Foreign Policy to 1985'. It appears simultaneously in
German in Europa- Archiv, Verlag für Internationale Politik, GmbH (Bonn) and
in Dutch in Internationale Spectator (The Hague).
287
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
THE WORLD TODAY August 1978
will also be true. Others will be less impressed by any special pleading on
Britain's behalf. The appearance of economic strength, at least relative
to past British performance, may contain a long-term danger of over-
extension. With more revenue at hand, the Government might be
tempted to accept commitments which involve some financial outlay
that will be difficult to sustain when the oil wells start to run dry. The
recent White Paper on North Sea oil noted how it could put Britain in 'a
stronger position to discharge her international responsibilities, not least
in relation to developing countries'.2 Dr Luns, Nato's Secretary-General,
has already put in a claim for some of the oil revenue on behalf of the
defence budget.
The major foreign policy benefit normally associated with North Sea
oil is the prospect of the release from dependence on the Organization
of Petroleum Exporting Countries (Opee). Alone amongst its major
partners and allies, Britain will enjoy secure supplies of oil sufficient to
meet local demand. This, it is hoped, will spare Britain the need to placate
the Arab states and offers the opportunity to avoid the worst ravages of
the coming tightness of world oil supply. Because of the importance of
these assumptions to estimates of Britain's international strength they
need to be examined with care.
The coming energy crisis
Oil has come to be considered a particularly precious resource because
of the existence of a powerful cartel capable of determining its price
beyond that justified by production costs or available supplies, because
of the considerable role it plays in meeting most countries' energy needs
(some 40 per cent in the case of Britain) and because world reserves are
finite. In the future there will have to be less reliance on oil. There is
concern that alternative energy sources cannot be introduced with sufficient speed to fill this gap. A number of authoritative projections have
suggested that well before the end of this century, some would say before
1985, the rate of production of oil will fail to match potential world
demand. This will result in energy starvation for those consumers unable
to meet the inevitable price increases. If the market mechanism works
imperfectly in such a situation there could be severe economic dislocations, as some countries continue to consume more than they can afford.
There will be considerable competition amongst those who can pay to
secure supplies.3
The timing of such a crisis and the validity of this whole scenario have
been the subject of disputes usually bound up with issues in energy
2 Prime Minister and others, The Cliallenge of North Sea Oil (London : HMSO,
March 1978), Cmnd. 7143.
3 On some of the political consequences of a severe tightening of oil supply, see
Working Paper on International Energy Supply:. A Perspective from the Industrial
World (New York: The Rockefeller Foundation, May 1978).
288
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
BRITISH OIL
politics. On the production side, much depends on the willingness of
Saudi Arabia to sell oil above the levels required for the purposes of its
economic development. Uncertainties on the demand side include the
degree of American dependence on imported oil, the possibility of the
Eastern bloc finding it necessary to purchase oil on the world market,
the success of conservation measures, progress with new, alternative
energy sources and the speed and scale of world economic recovery. If
recovery continues to be slow and if energy conservation measures prove
to be effective, the crunch could be postponed. Certainly in the short
term, with demand still depressed and new fields coming on stream, in
Alaska as well as the North Sea, there is, if anything, a glut of oil. Estimates from the Department of Energy suggest that there will be ample
supplies over the next few years, and that by 1985 there will still be 'substantial spare capacity even at the top end of the demand range'. By the
late 1980s or early 1990s, however, supplies are liable to be tightening.4
The North Sea oil fields were hurried into production because of the
need for a boost to the economy and because of a desire, after the traumas
of 1973-4, for a measure of energy self-sufficiency. This was not a
response to a long-term supply problem but to a short-term embargo
and a well-organized cartel. As things stand, production from the main
fields will peak in the early or mid-1980s, and decline steadily from the
early 1990s. According to the above projections, this peak is coming too
early. If we could (i) delay, and (ii) stretch out production of North Sea
oil, the later barrels could be meeting an urgent need and be commanding
a much higher premium. (Some expect world energy prices to double
or even treble over the next 20 years.) There may therefore be a financial,
as well as an energy supply argument for slowing down the depletion
rate of our reserves.
Tomorrow's gain, of course, will have to be significantly higher than
today's gain to compensate for the loss of a long-term boost to the
economy and a full return on investment. There might then be doubts
over whether it is wise to forgo undoubted and tangible benefits to the
balance of payments and potentially the structure of the economy now
for the sake of surviving a hypothetical threat in the 1990s. There are also
technical factors. Each field has an optimum production profile based on
the natural rate of flow of its oil. Excessive interference in order to acceler-
ate or restrict production will involve some costs.
Though there are a number of tactics available to the Government for
delaying some production, its freedom of manœuvre is not great. In 1974,
in order to encourage production, a number of assurances were made to
4 Department of Energy, Energy Policy: A Consultative Document (London:
HMSO, February 1978), Cmnd 7101, pp. 8-13. US estimates are more pessi-
mistic, suggesting that demand might exceed supply as early as 1981 and that a
substantial gap could develop by 1 985 . The International Energy Agency ( IE A) has
recently forecast a notional demand gap of 4-12 million barrels per day by 1985.
289
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
THE WORLD TODAY August 1978
the companies, including one that no delays would be imposed on finds
made up to the end of 1975. The effect of these assurances removes onehalf to two-thirds of known reserves from imposed delays. It is therefore
unlikely that depletion rate controls will be able to shift the period of peak
production by a significant amount; it is more likely that they will be
used to ease the transition period out of net self-sufficiency. However,
in practice, delays caused by bad weather and technical problems are
already providing inadvertent depletion controls. In addition, there is
now some evidence that wrangles over participation agreements plus
new fields taking longer to appraise than did the first 14 'have made it
seem less likely than formerly that production will build up to a fairly
sharp peak in the early 1980s'.5 Commercial exploitation of new fields will
be to a considerable extent determined by developments in the price of oil,
and will thus be responsive to the general world supply situation. Though
a large proportion of the oil will have been used up before the 'energy
crisis' arrives, if it does arrive, Britain can expect a smoother passage than
others through its early stages.
Energy independence
The sense of immunity to serious supply disruption, encouraged by
the use of such words as 'energy independence' and 'self-sufficiency' in
discussions of North Sea oil, is not justified. That the oil will only be
available for a limited period is not particularly relevant. Ten years may
be a short time for energy planners, but it is still a long time in politics.
By the 1990s, the political demands from the Middle East may have taken
on a different character. The main danger is of over-estimating the extent
to which Britain can ever be independent. It is too much a part of the
international economy not to feel the reverberations of any crisis afflicting
its partners. Furthermore, Britain will still need to import substantial
amounts of oil from the Middle East. This is because North Sea oil produces 'light' crudes which command a high price on overseas markets
but are not particularly suitable for many British refineries unless mixed
in proportions of 35:65 with heavier Middle Eastern crude. There is
therefore an economic argument for exporting a substantial percentage
of North Sea output. The official policy is to refine up to two-thirds of
North Sea oil in UK refineries. This has been interpreted with some
flexibility: in the past year, over 40 per cent of North Sea oil has been
exported. Some of the oil companies are arguing that as much as 50 per
cent of the oil should be exported and others would say more.
The Government has indicated a desire to enhance genuine selfsufficiency through the expansion of refinery capacity from the current
136 m. tons to 150 m. tons. As with some Opee states, there is an interest
in more down-stream processing so as to increase the value of an in5 ibid. , p. 35.
290
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
BRITISH OIL
digenous raw material. Unfortunately there is considerable over-capacity
in European, let alone world, refineries. In consequence, opportunities in
this sphere will be limited. The European Commission has been pressing
for a reduction of European refinery capacity, desiring to shut down
plants that are elderly, environmentally inadequate and situated in areas
of high concentration of refineries. This plan has a number of problems,
one of which is the reluctance of the British Government to contemplate
cuts, arguing for an entitlement to a greater share of this industry by
virtue of the North Sea production. Yet while existing British refineries
are only used to the extent of some 60 per cent, to refine the 'light' North
Sea crudes properly would require new plants. Furthermore, processing
North Sea oil in British refineries could be more expensive than in existing European plants, as there will be a need in costing to ensure a return
on capital investment. A final point is that the value added by refining
may well be less than the lost premium of 'light* crudes on world markets.
One London stockbroking firm has argued that the cost of insisting on a
rigid refine-at-home policy could be as much as £163 m. by 1980. Out
of recognition of the danger of losing the premium value of North Sea
crude there are now signs that the Government accepts the limits on a
refine-at-home policy for the medium term.
However, the Government still appears to be unwilling to forgo the
possibility of an expansion of refinery capacity. In the meeting of EEC
energy ministers late in May, British resistance was a factor preventing
agreement on refinery cut-backs. This was done for reasons of principle
concerning national sovereignty, rather than because of interference with
immediate plans. The Commission has indicated that it is not seeking to
abort the two new refineries already planned by Britain. One cost incurred by Britain for taking this negative stand was the rejection by Italy,
which is anxious to get subsidies to ease cut-backs in its excess refinery
capacity, of a scheme to subsidize the use of EEC-produced coal in power
stations. This scheme would have benefited Britain. There are other
areas where a strict 'refine-at-home' policy will cause conflict with the
Community. It could well fall foul of Article 34 of the Treaty of Rome
which forbids quantitative restrictions on trade between members. If
another EEC member were willing to pay more for available oil, the
British would be obliged to let it go.6 Insistence that all North Sea oil
must be landed on British territory unless a special waiver is given by the
Energy Secretary is currently being investigated by the Commission as
an impediment to free trade within the Community. The Government
appears to be ready to accept irritated relations with the Commission
and its EC partners in the energy field in order to safeguard a principle
that economic common sense suggests ought not to be exercised.
6 See N. J. D. Lucas, Energy and the European Communities (London : Europa
Publications, 1977), pp. 122-3.
291
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
THE WORLD TODAY August 1978
Security against embargoes
If Britain still has to meet up to half its oil needs by imports, even
though exporting an equal or greater amount, then it will not be insensitive to sudden cut-offs of oil from the Middle East. It is only becoming
significantly less dependent on those Opee members which produce
crude oil of a comparable quality: Libya and Nigeria. Even without
dependence on oil supplies there would remain a number of very good
reasons, pertaining to trade and investment, why it would want to keep
on good terms with the major Opee countries. Some concern has been
expressed over the effect of a decline in imports of Nigerian oil, plus
competition for markets for light crudes, on Nigerian attitudes towards
the large trade surplus in Britain's favour.
Under International Energy Agency (IEA) and EEC arrangements
Britain is expected to prepare for an embargo. Such preparations involve
maintaining emergency stocks and agreeing on distribution of available
supplies in the event of a crisis. Emergency stocks are held in the inventories of the companies. These currently involve some 17 million tons of
oil stores at an annual cost of some £55 m. With North Sea oil there is an
argument for developing a deliberate amount of 'shut-in' production
which could be released in an emergency. This would make particular
sense in connexion with a depletion rate policy designed to stretch out the
life-span of the oil reserves.7 Under the IEA Britain is expected to hold
an 'emergency self-sufficiency capability* so as to be able to endure a
total denial of net imports for 70 days at a level of 90 per cent of normal
demand. IEA rules permit Britain to maintain a considerable amount of
this capability in shut-in production. The second important feature of the
IEA arrangements concerns the distribution of North Sea oil in the event
of a serious disruption of supply from the Middle East. In such a situation
it might be possible, for a limited period and inefficiently, to divert to
British refineries oil intended for export. Under any circumstances, this
would irritate deprived consumers. Under IEA arrangements, there is
not even an incentive to consider such an action.
With the first 10 per cent of cuts afflicting the IEA countries, Britain
would be expected to reduce its own consumption by 10 per cent (though
some of this could be avoided by using stockpiles or spare production).
In allocating the burden of cuts above the 10 per cent level, credit will be
given for the level of Britain's oil production, whether or not the oil produced is being exported from or refined in the UK. The higher the level
7 The political disadvantages of this policy have been pointed out in an unpublished paper by Ed Krapels on 'Oil and Security in Great Britain*. With a
conventional stockpile, Britain would not stand out from other IEA members in
the response to an embargo. With shut-in production, it would be able to make a
distinctive response. By increasing oil production, as would undoubtedly be
requested by its partners, Britain could be seen by those imposing the embargo
to be making a determined effort to break it and could thus become a target for
further attempted sanctions.
292
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
BRITISH OIL
of production the greater the supply right. Britain thus has a clear interest
in the IEA because, if the IEA allocation scheme works, the fact that so
much of North Sea oil will be exported will be discounted in determining
its supply right. In return Britain is expected to maintain 'normal supply
patterns'.
EEC contingency planning has tended to follow the guidelines of the
IEA. A Council Directive of February 1977 spoke of the need to maintain
traditional trade patterns' in the event of an emergency. The main
difference has been in stricter stockpiling requirements. A 1968 Directive
requires the maintenance of stocks equivalent to 90 days' consumption.
An exemption of 15 per cent was made to take account of indigenous oil
production. The British have been pressing for a greater exemption and
last December the Commission responded by proposing that this should
be increased to 40 per cent, bringing the minimum level of stocks down to
54 days' consumption. However, this concession applies to all member
states and is based on a view of North Sea oil as a Community rather than
a particularly British resource. In order to justify an all-round reduction
of stocks the Commission proposes that 'normal supply flows of these
crudes and products between Member States shall be maintained in the
event of supply difficulties'. That is, whatever the difficulties Britain
was facing in securing its regular imports of crude and products, the
volume of exports to member states should be maintained. The only
credit Britain would get would be determined by the normal supply of
oil to home refineries (so increasing the security argument for building
up indigenous refinery capacity). A more serious problem is that the
attempt to maintain supply flows to EEC states could well conflict with
attempts to maintain supply patterns with all IEA states. In 1977, only
58 per cent of Britain's oil exports went to the EEC, with 29 per cent
going to North America and 11 per cent to non-EEC Scandinavia. The
EEC proposals require Britain to take a greater share of any Community
burden but they raise the prospect of some of this burden being imposed
on the rest of the IEA, and in particular the United States.
The Commission proposal allows for some flexibility in that 'supplies
may be adjusted in accordance with decisions which have been taken
at Community level'. It is doubtful that the British Government will be
enthusiastic about handing over decision power on the distribution of
North Sea oil to the Community. There is a further question as to the
wisdom of attempting to make difficult decisions about burden-sharing,
which might well involve non-EEC states, in the midst of a crisis rather
than rely on the politically less controversial approach of maintaining
normal supply patterns.
Britain as an oil-exporting state
Because of the IEA measures and the growing interest of the oil pro293
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
THE WORLD TODAY August 1978
ducers in the economic health of the West, many people doubt whether
the oil weapon will ever be used again as it was in 1973. With progress
towards a Middle East settlement still slow, a certain amount of contingency planning would seem to be prudent. Britain has to work out
the responsibilities imposed by its status as an exporter in such a scenario.
As we have seen, the current economic argument lies strongly with
exporting in normal times a substantial proportion of North Sea oil.
Under IEA rules, there is no strong counter-balancing security argument
in favour of a refine-at-home policy though there could be one if the latest
Commission proposals are accepted.8 So long as Britain does have oil to
sell it will have some sort of lever in international relations, especially
if there is more of a sellers' market during the 1980s. Decisions about
who is to get how much of North Sea oil could prove to be quite difficult
during the coming decade.
For the moment, few firm decisions on either the level or distribution
of exports appear to have been made. Oil companies have been discouraged from signing long-term contracts for refining North Sea oil abroad
and any contracts have been scrutinized carefully. Some sort of policy
is required. How responsive should Britain be to the desire of its European partners for privileged access to North Sea oil? West Germany is
already deliberately importing more oil from Britain in the belief that
this will be a more 'stable' supply.9 To what extent can the high United
States demand for 'light* crude be satisfied at the expense of European
demand? Are there any means by which North Sea oil could help Britain
gain secure supplies of the oil it will need to import? A proposal by
Venezuela has been reported in which Venezuelan 'heavy* crude would
be swapped for British 'light* crude. What can the Community offer
Britain in return for privileged access? With oil having to sell at a discount at the moment, there is still interest in a guaranteed minimum
price. Another possibility might be Community subsidies to help finance
the exploitation of the more marginal fields.
British ministers have hinted, often in a jocular mood, at future membership of Opee. Already Britain exports as much as some of the smaller
members of Opee. There are no self-evident reasons why Britain should
8 However, as explained earlier, an expansion of British refinery capacity would
contradict Community attempts to cut back capacity.
8 Some 7 per cent of the Federal Republic s oil needs were satished by British
crude in 1977. This percentage could double in 1978 : Financial Times , 5 January
1978. German confidence in the stability of this source may have been dented by
the argument over the freedom of the German Deminex consortium to dispose
of its oil from the North Sea Thistle Field as it wishes. In June a deal was an-
nounced between British Petroleum and the German Veba group (which has a
54 per cent stake in the Deminex consortium) by which British Petroleum agreed
to assure Veba of supplies of 3 million tonnes of oil per annum for the next 20
years at competitive prices in return for greater penetration of the German market
for products. However, the oil involved is to come from the Middle East and not
the North Sea.
294
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms
BRITISH OIL
want to join the organization. It would merely have a symbolic significance - an identification with one of the world's major power blocs. But,
apart from oil matters, Britain does not share many interests with other
members of Opee. (In fact, because oil exports are not the predominant
source of national wealth Britain would not qualify for membership.)
Furthermore, its influence within the organization would be small. Its
contribution to world production is too small (at most, it will be about
4 per cent) to make a lot of difference on a global scale, though it could well
make a difference on a regional scale. It has been content in the past to
accept the international price set by Opee as the basis for its own prices
without being seen to be in any way responsible for the level of that price
Its major interests lie with the world's oil consumers rather than the oil
producers.
The British Government has made its belief known that North Sea oil
creates distinctive British interests that need careful protection. Such
interests do exist, but they are not overriding. The autarchic instincts
betrayed by the Government when it comes to oil have resulted in controversy within the Community for stakes that are not particularly large.
Some of the economic benefits to be gained by net self-sufficiency would
be lost in any attempt to make this self-sufficiency absolute, without there
being any compensating security benefits. The most important point is
that, even with independence in oil supplies, Britain will still be depen-
dent on the rest of the world for trade and other raw materials. If the oil
is to be used to regenerate British industry, the regenerated industries
will need markets. Though in a crisis it may give satisfaction to be relatively better off than others, if its major trading partners are suffering then
Britain will suffer too.
Table i
Forecast of United Kingdom Continental Shelf Oil Production
Year 1977 1978 1979 1980 1981 1982
Forecast production
(m. tonnes) 38 55-65 80-95 90-110 100-120 105-125
Source: Department of Energy, Development of the oil and gas resources of the
United Kingdom 1978 (London : HMSO, April 1978), p. 3.
295
This content downloaded from 130.113.111.210 on Sat, 07 May 2016 05:54:55 UTC
All use subject to http://about.jstor.org/terms