The politics of oil prices

With the price of 35-gallon barrel of Brent Crude at $72.54 at the time of writing, the only concern for most of us is the scale of the benefit and whether we, consumers of last resort, get the relief we're due. That's rational. It doesn't quite cover every nuance, however, in the strange, secretive world of oil politics.

Take a parochial example. Some who were on the winning side in Scotland's referendum have been exulting over falling oil prices in an oil-producing country. They feel vindicated. All their warnings of dangerous volatility have come home, roosting and crowing. A kibosh has been put, they think, on Alex Salmond's vain schemes for a $100 a barrel Scottish economy.

But this is odd, verging on fatuous. Even by the former First Minister's ambitious time-scale Scotland would not have been independent until 24 March 2016. Any loss of revenue would be - already is - on the books of a United Kingdom government that does not have its monumental debt and deficit problems to seek.

Is George Osborne, the Chancellor, delighted to see Brent Crude at $72 a barrel? Judging by our reports of what his autumn statement has in store, he means to ride to the rescue of a North Sea industry he pillaged just a few years ago.

If oil is below $80 a barrel a significant number of fields cease to be viable. Plans for deep-water extraction in the north Atlantic stop making sense. The debt and deficit holes in Mr Osborne's "long-term plan" grow bigger.

And because of this deep damage to the UK, the UK's defenders find reasons to cheer? There are, to take one number, some 450,000 tax-paying people in these islands whose "high-value" jobs tie them to the industry. Even in a poor year, with 38 of 67 fields claiming allowances and paying no petroleum revenue tax (PRT), the oil industry coughed up £6.5 billion for the Treasury in 2012-13. That's money Mr Osborne can't afford to lose.

In the world of oil politics, few who matter care. Local blessings and curses become incidental effects in a version of global war by other means. A UK finance minister might tell us - and Mr Osborne did tell us - that his Treasury can "better absorb" oil shocks than a small independent country. But since his government was no more adept than Mr Salmond or anyone else at predicting prices, the Chancellor overlooked a few details.

There's fracking, for one thing. Mr Osborne and his friends couldn't see past this technology a few weeks ago. At $72 a barrel for oil, with a parallel effect on gas prices, the promised bonanza loses touch with economic reality.

The American fracking industry, a less complicated proposition, was already in retreat before prices for Brent Crude and West Texas Intermediate - the other benchmark - began to tumble. If the oil price stays below $80 a barrel, fracking will make no sense.

Around the world, producing countries and their customers are struggling to work through the consequences of OPEC's decision in Vienna last week not to cut oil production. For one example, the filthy business of extraction from Canada's tar fields lost its economic rationale, but so too - arguably - did numerous plans for renewables in Scotland and beyond. Oil is cheap again. The planet might suffer, but consumers are not likely to complain. OPEC is counting on that.

A UK government determined to subsidise nuclear has been made to look especially stupid. The (French-owned) EDF plant at Hinkley in Somerset was a bad deal even when oil prices were within their recent range. David Cameron and Mr Osborne used energy security as an excuse to justify a guaranteed price - a subsidy, by any definition - that beggared belief.

But do the sums. The wholesale price of electricity in this United Kingdom has already dropped to £48.80 a megawatt hour. EDF has a contract promising fully £96.60 per Mwh. It was daft before OPEC's decision; it looks insane now. If those are the best prices available for a new generation of nuclear in the UK, Mr Osborne's UK government has made a calamitous strategic error. But cheap oil destroys every calculation.

That sentence might supply part of the real narrative. OPEC, driven by Saudi Arabia, is taking out the competition by allowing prices to fall. In years gone by, the princes and their hirelings took the opposite tack. In the 1980s, they managed to bump the oil price from $10 to $100 just by turning off the taps. Now, to preserve "market share", they are bent on rendering every alternative - fracking, tar fields, renewables, nuclear, difficult neighbours, non-OPEC production - unviable by allowing the price of a barrel to fall.

The Saudis and the United Arab Emirates have the cash reserves to sustain their strategy for at least a couple of years. Other countries have no such comfort zones. If you understand oil in terms of politics, those countries make for an interesting list. Non-OPEC Russia suffers most: already the rouble has collapsed to levels not seen since the 1990s. You might read that as a message sent to the hubristic regime of Vladimir Putin.

Then there's Venezuela, possessor of the biggest oil reserves on the planet. The United States, it is fair to say, is not fond of the heirs of Hugo Chavez, their socialism and their determination to keep the big oil multi-nationals away from the people's bounty. Venezuela, like Brazil, depends on oil for its economic stability. A falling oil price is a calculated catastrophe, made in Riyadh and Washington.

The same could be said of Iran, perennial thorn in the sides of the US and the Saudis. It could be said of Mexico, Columbia, the green energy enthusiasts, and anyone liable to misunderstand the power of OPEC. Collateral damage to the UK, forever turning a blind eye to the nature of the Saudi regime, is a trivial matter.

To talk of all this in terms of supply and demand is naïve. The supply of oil from the big producers, as OPEC has just demonstrated, is a matter of choice. Fracking aside, the US will cope and thrive. China will hardly complain. As for certain parties, what luck. Or as Thomas Friedman observed in the New York Times at the end of October, the game is "to bankrupt them by bringing down the price of oil to levels below what both Moscow and Tehran need to finance their budgets".

One day, no doubt, Mr Osborne's memoirs will tell us what, if anything, he knew about all this, and what he had to say. Perhaps he will stand revealed as a stout defender of the wealth of the people of Scotland amid the geo-politics.

I'll put $72.54 on a bet against. Meanwhile, little Norway soldiers on with its $1 trillion wealth fund.