Dr Steve McCabeBy Dr Steven McCabe – Birmingham City Business School

The economic problems experienced in this country the early 1970s were, in large part, caused by the price of oil rapidly increasing.

Though we were to become a major oil producer, our development of the North Sea was still under development.

Our economic expansion in the decades after the second-world-war had been greatly assisted by the importation of cheap oil found in the Middle East.

But as anyone who has filled their car with fuel in the last thirty or so years will tell you, the price of oil has increased steadily. Given the fact that oil is essential for so many things we depend there is the consequential knock-on effect which make us all poorer when wages are stagnant.

Having our own supply of oil (and gas) produced in the North Sea undoubtedly assisted our economy in the 1980s – especially when the unemployment rates increased rapidly under the Thatcher administration.

We know that oil and gas supplies are non-renewable and that this means we need to find alternatives to ensure that we have access to energy that will allow us to continue our voracious appetite for fuel to run our vehicles and provide power for heating and electricity.

The recent debate concerning the merits of nuclear fuel can be seen to be one such alternative though, as we know, it is not the ultra cheap fuel that it was claimed to be when the first generation of plants were being developed in the 1950s.

In the meantime we are forced to compete on the international market for fuel.

And the increasing number of emerging economies means that the market for oil is now more competitive than ever.

Unsurprisingly, China, one of the ‘BRIC economies’ (Brazil, Russia, India, China), in now making its presence felt in the market for oil.

China is the biggest importer of oil from the Middle East and it is believed that this year it will surpass the US as being the largest importer in the world.

One of the reasons for this is fairly straightforward; China’s increasing love of the car which, for the foreseeable future, will use oil for fuel.

China is a country which has an extremely abundant supply of coal and, until now, has been able to use that to provide the fuel for its power plants which have been constructed at a phenomenal rate; up to three a week.

And another footnote that should not be forgotten when considering the rapid development of China’s productive capability and economic expansion is the death rate in the coal mines. Though some 1384 lives were lost last year this is a vast improvement on the almost 7000 fatalities in ten years previously.

As the cost of extracting coal goes up due to increased wage levels and safety standards, importing oil become an attractive replacement.

And like every other economy which has become wealthier, Chinese people want to enjoy the benefit of owning their own car.

It currently builds 16 million vehicles a year and so has overtaken the US which currently makes 14.5 million, though by 2020 it is believed it will be making 30 million a year.

It is to be acknowledged that the total number of vehicles in China (about 80 million) is far fewer than Europe and the US (approximately 260 million and 250 million respectively).

So perhaps we shouldn’t be surprised by the fact that China now has a very direct interest in exploration of oil in the North Sea because its state-owned Cnooc acquired a 43% stake in the Buzzard field through its takeover of Canada’s Nexem.

Additionally China’s Sinopec purchased a 49% stake in the UK operation of Canada’s Talisman Energy.

Through these acquisitions China now owns some 12% of the UK’s production of oil (and gas); about 200,000 barrels a year.

Undoubtedly this is good news as there will be additional investment by the cash-rich Chinese in the North Sea which though still producing 1.55 million barrels a year, is a third of the peak output achieved in 1999.

It is significant that the number of new wells being drilled was up by a third last year to 65, though it is important to understand that these are in deeper water and so any oil extracted will be more expensive.

China’s increased interest in oil is significant in that it presents the potential for a shift in geopolitics apropos; a natural resource that is economically essential to all developed (and developing) nations.

It is predicted that by 2035 China’s use of electricity will be greater than the current demand of the US and Japan combined. This will, it is suggested, require an annual consumption of of 545 billion cubic metres of gas which is quadruple current usage.

Significantly by 2030 China’s daily consumption of oil will be in the region of 17.5 million barrels which means that it will be a very serious player in the international market.

Acquiring oil and gas exploration and extraction companies may be seen as simply the latest phase in the continued strategic investment in gaining control in resources that will be essential to China’s future economic development and prosperity.

However, whilst we will enjoy the tax that will come from China’s investment in the North Sea we should be aware that the actual product will be used to make products that will potentially be exported to us.

Those with most money can buy up the essential resources.

We may not like it but such are the harsh realities of the contemporary economic world.

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Dr Steve McCabe

Dr Steve McCabe

Birmingham City Business School