British state capacity and Peak Brent Oil

By Fester:

Great Britain has been the recipient of a massive and fortunate fiscal gift for the past two generations.  It is an industrialized, modern, energy intensive nation that is also an oil exporter.  The North Sea offshore fields provided a steady, dependable counter-cyclical stream of oil revenue to the Exchequer while the mature British economy could produce returns that are comparable to returns on investment in the energy sector so the oil curse was at worse, mildly felt.  However, British oil production is in decline.  Since 2004, Britain has been a net oil importer and it has been importing in the face of record dollar and pound denominated prices.  Imports are increasing and the current account deficit is matching that increase. 

As the North Sea declines, there are fewer barrels of oil for the Government to tax, although it is receiving a much larger fee per barrel due to the price increases.  The North Sea is predicted to decline at double digit annual rates.  This will have a dramatic impact on the budget as a major revenue hole will be created that can not be papered over by higher revenues per barrel produced. 

We have looked at a similar situation in Mexico two months ago as the Mexican government receives roughly 40% of its revenue from taxation of oil production.  Mexico, like Great Britain, is seeing its major fields in serious decline.  Are these scenarios similar?

Higher prices are masking the pain at this point but Mexico is entering the Export-Land problem.  Higher local demand is keeping more of its oil off the international market and thus leading to a decline in hard currency earnings.  One estimate is that Mexican oil exports could go from a 2007 average of 1.67 million barrels per day to less than 280,000 barrels per day in 2016.  Even projecting high per barrel prices this is a net decline in overall revenue and a massive decline in revenue per capita. 

So given these trends, how much ability does the Mexican elite have to maneuver?  Not much at first glance unless they can clean up their own acts to free up resources for effective, responsive and localized public good projects that can not be matched by the drug gangs which are seeking to create a hollowed out and ineffective state. 

Great Britain is starting at a massive advantage over Mexico in that it is not the nexus of massive black market smuggling into the largest market in the world.  It also possesses significantly greater, deeper and more resilient social and civic capital networks.  However the crux of the problem remains; both governments have made very signficant promises that were significantly backed by oil revenues.  In the next few years, those oil revenues are under severe threat due to geology and physics and numerous promises may be broken as services are either not provided, or different constiuencies are taxed.  How will either government resolve the diminishment of their state capacity?

Comments

[Steve Hynd]

The Brits are betting on two things - a fairly rapid transition to nuclear and renewable power generation for domestic use (wind and wave mostly) so that they can seel their oil instead of burning it alongside an assertion of the UK's rights to resources in the South Atlantic, over which a war was fought a few decades back. Britain is seabed-grabbing around the Falklands in the same way Canada, Russia and Norway are doing inside the Arctic Circle.