Falling oil price a curse for British economy?
HURRAY for falling oil prices in the UK. Cheaper petrol, lower heating bills and effectively a tax cut handed to the British people courtesy of the Kingdom of Saudi Arabia and its benevolent oil sheikhs: Not quite. Dig a little deeper and Britain's economy is among the most vulnerable of all developed industrialised European economies to the negative effects of falling oil prices. The reason for this is that British investors and pension fund holders are amongst the most exposed to the energy industry with the North Sea as its beating heart.
The industry around Aberdeen is vital to the overall health of the UK economy providing one of the few reliable sources of revenue for the Government since drilling began around the North east coast of Scotland in the early 70s. Around 450,000 people are employed in the oil and gas industry across the UK and in the financial year ending 2013 the Government earned £6.5bn in taxes from petroleum producers. But that was during a period when oil prices ticking along at above $100 per barrel appeared to be the new normal. The North Sea now finds itself caught in no man's land between a vicious battle being fought by Saudi Arabia, Russia and shale oil drillers in the wastelands of North Dakota.
After years of slowly losing market share Saudi Arabia - the world's largest exporter and cheapest producer - has finally woken up to the danger and allowed oil markets to remain oversupplied in a bid to knockout its rivals who have higher production costs and require higher oil prices to remain profitable. Although as a region the North Sea is in general decline, production costs are high with many fields losing money when then cost of oil falls below $50 per barrel.
In aiming their oil weapon at Russia and US shale, the Saudis are also inadvertently pointing it at us. Oil companies have already started to cut thousands of jobs in Aberdeen and more losses are expected over the next six months. Contractors who still have work are being hit in some cases by 30pc reductions in pay, or if they're lucky and freeze on salaries. Although the Chancellor George Osborne is widely expected to provide a significant tax relief package for the North Sea in the March budget that money will have to come from somewhere and a lot can change in an election year.
The Treasury is already facing a giant black hole in lost tax revenue from the North Sea and Mr Osborne has pledged not to subsidies oil companies by adding more tax onto the price of petrol before the election. This begs the question how will the Chancellor replace billions of pounds of lost revenue from the oil industry? Investors and people about to retire could also take a big hit from Saudi Arabia's oil price war. Resource companies including Royal Dutch Shell, BP and BHP Billiton account for 15pc of the weighting of the FTSE-100. Combined these corporate titans account for billions of pounds worth of shareholder value, hundreds of thousands of jobs and significant tax revenue for the Treasury.