If we ever really do discover significant quantities of exploitable oil in Irish waters, I would like to make a two small requests. First, remember that this has happened to other countries; let’s try to learn from their experiences. Second, let’s try to learn from our own history.
One of the most important lessons from the bit of the financial crisis that was domestically generated is that temporary tax revenue windfalls should not be treated as if they are permanent. The stamp duties and other taxes from our housing boom were sprayed around as if they were going to last forever. The spending proved to be far more durable than the revenues. So, when it comes to tax revenues from any oil discoveries, treat them properly: they will be as finite as the oil. Future generations do have something of a claim on them as well - after all, we are leaving those same generations our debts.
A study of Britain’s experience with North Sea Oil is a must for policy makers thinking about what to do with our, still very hypothetical, oil bonanza.
The journalist and historian Andrew Marr has remarked on the relative paucity of analysis and discussion of just what 40 years of oil has meant to the UK. Political memoirs from all the big names of the time, from Thatcher to Blair, barely mention the North Sea.
Just why this is the case is a matter for speculation. Marr suggests that geography has something to do with it: most of the action either took place half way to Scandinavia or in remote parts of Scotland.
But there is also embarrassment, or at least a vague sense of unease, over the possibility that the legacy - the cash - has been squandered. There is an almost incredible story of the then British Energy Minister, the hard-left Tony Benn, while in Tehran, being lectured by the Shah of Iran about standing up to US oil interests. Anyone who knows anything about either of these men will find that richly ironic. And replete with contemporary lessons. There are few historians of the period who think that UK governments were terribly successful in dealing with vested interests. It may have been a forlorn hope, given the scale of the technological challenges that were ever present, but an indigenous, British owned, oil industry never really materialised. The British National Oil Corporation was an attempt at both ownership and control by the government but it was eventually privatised and ultimately absorbed into BP.
Debate at the time was fierce. Little consensus ever emerged about what was the right thing to do. Nobody ever seriously suggested setting up a Norwegian-style savings fund, into which the tax bonanza should be sunk. The Chancellors who benefitted the most from the extra tax, Howe and Lawson, were happy mostly to spend the windfall and to cut income taxes. Lawson, in particular, argued that the economy needed the kick start that his oil-funded tax cuts provided. Prominent industrialists, by contrast, argued that it would be better to leave the oil in the ground rather than fritter its benefits.
What lessons should we take from all of this? Without embarrassment, acknowledge that we are amateurs, particularly when it comes to negotiating deeply technical matters with hard-bitten experts (shades of negotiating with the troika?). Royalty regimes, production sharing arrangements and the like are traps ready and waiting for us. Some people clearly think that we have already fallen into one or two of them. But it surely is not too late to get it right. Lessons from game theory and the sale of telecom licences may be instructive.
Keep it simple and set taxes high. If they are too high, the oil merely stays in ground for a bit longer. A risk worth taking in my view. Avoid the temptation to spend the money now, because the economy “really needs it”. Thats exactly what the UK did. The technically correct way to share the revenues fairly across generations is simply to pay down government debt. If that is too arid, or just politically impossible, then recapitalise the now almost empty National Pension Reserve Fund.
