Petrostate Tail Risk: Add the U.K. to That List

by: Gregor Macdonald

The coming February issue of Monthly will be taking a look at Petrostate tail risk. This is the risk that oil production and especially exports from oil producing nations could collapse as a result of sudden political instability. That instability could unfold in oil producing areas alone, or, it could be a phenomenon that engulfs the entire country. Possibilities range from a widespread labor related shut down of UK North Sea oil production, to a total collapse of federal governments in Abuja, or Mexico City.

Petrostates are highly individualistic, with their own unique histories. But because they produce oil, they are too often lumped together as a monolithic group. Risk to the stability of petrostates is not simplistically derived from falling oil prices. It’s a multi-factorial problem. Equally, as I begin to rank petrostates on a scale of risk, there are surprises.

One country not normally considered a petrostate, where I see a lot of rising risk, is the United Kingdom. A perfect storm of conditions have combined in the last few years that outpace the fact that oil production is a much smaller part of UK GDP, than is typically found in other petrostates.

First, the UK has only just in the last two years tipped from net oil exporter to net oil importer. The change is then magnified by the fact that UK natural gas demand increasingly calls upon global LNG supply. This is a hard corner. Unlike other petrostates, the UK was not seeing enormous oil revenues that dwarfed GDP from other sources. Rather, oil revenue and security of supply were more embedded into overall UK financial strength, and partly formed its ability to become a nation oriented towards financial services. To have this oil revenue slip back from the net export threshold is not trivial, for the UK. And now, to have this revenue fall so dramatically in terms of price, and volume, at the same time The Square Mile is imploding, makes for a very big change, a large “delta.”

Pressures such as these lead to labor actions. This month’s protest in the UK against foreign workers directly impacted the UK oil refinery complex. And this echoes last year’s labor action, at the Grangemouth refinery. Readers may recall the Grangemouth strike also affected UK North Sea oil production, as supply flow is part of a chain that depends very much on northern refinery complexes to take up daily production. This is exactly the kind of delicate, high level optimization that makes developed countries more vulnerable now, when compared to less developed countries.

While this is a thesis I’ve developed over the past few years with regard to petrostates, it’s also a view which I heard expressed by Nassim Taleb with regard to the global financial system. Highly developed and stable means to be at risk. Flatter, less developed means to be more robust. During these storms. In a televised interview this week, Taleb said: “If a new phase of political instability comes to the world in this financial crisis, where would you rather be–in London, or Moscow? I would rather be in Moscow.”

I will cover the totality of petrostate risk in February’s newsletter. Despite the fact that the UK is rising on my list, it’s unsurprisingly not as high as Nigeria or Mexico.