Tuesday, 27 July 2010

The A to Z of Aberdeen - D

D is for The Dutch Disease

(Hmmm, we've got a bit of a Netherlandish theme going here - it's just a co-incidence.)

Anyway, here's the meat... it's all a bit pencilneckish, but stay with it, it is worth it, honest.

The Dutch Disease is a concept in economics which explains how the development of a natural resource extraction business sector (like oil and gas) and its associated economic boom can over-balance an economy, causing decline in non-extractive value-adding sectors - particularly the manufacturing sector, but also in agriculture. The pathology of the Dutch Disease is accompanied by moral decline in the personal sphere (affluenza) and turpitude in the public sector (government) as it becomes entangled with big-money business interests. Hmm... sounds familiar?

The term was coined to describe the decline of the manufacturing sector and moral fall-out in the Netherlands in the 1970's following the discovery and exploitation of the gigantic Groningen gas field. The worlds largest ever public-private-partnership (Gasunie) was formed by Shell, Esso and the Dutch State to exploit this resource. At its height, it was not possible to say where the state ended and Gasunie began. Or vice versa. The question was meaningless.

The mechanism goes something like this...

The booming sector (resource extraction) increases the demand for labour and capital which in turn causes the movement of production away from other sectors (in particular, away from value-creating manufacturing and agriculture).

This is compounded by what some economists call the 'spending effect': As personal wealth (for some) increases, it causes an increase in demand for capital and labour to be directed towards the service sectors (including business and personal services, catering, retail and real estate). This, of course, further draws production away from the manufacturing sector and agriculture.

Moreover, this increased demand for service sector goods leads to an increase in prices for these goods and services. The price for the primary resource in the booming resource sector (in our case oil and gas) is set internationally, and so cannot be affected by local economic factors. As price levels for service sector goods and real estate in the local economy boom, this in effect increases the effective exchange rate for individuals and enterprises looking to move into or out of the area. Of course, we are part of the UK and use GB Pounds Sterling as our medium of exchange, it's just that, in this town your GB Pounds exchange for fewer service-sector goods (from haircuts to real estate) than they do in most of the rest of Scotland.

The Oil and Gas industry makes up almost a quarter of the value of our economy in the North East of Scotland. It employs around a fifth of our workers. According to Aberdeen City Council, at current rates of extraction, the currently proven reserves will be effectively depleted by 2016.

From ACC's City Centre Development Report (big PDF).

...peak oil production is now in the distant past and current predictions suggest that as much as 25 billion barrels of oil might still be able to be produced with most of that being in the next 10 years. The current position is that there are 6 years of proven reserves.

It is not our intention to hold forth on Peak Oil, or start a debate about enhanced oil recovery techniques, which will surely improve upon the council's bleak forecast. However, the question must be asked - where is the world-beating marine renewables industry which we were promised would form a centre-of-excellence energy-hub? That was supposed to be in Aberdeen, ready to step in and take up the slack as oil and gas ran down, wasn't it?

When I talk to oil industry people about their intentions, they don't discuss cross-sector transferrable subsea technology. They don't speak of marine skills transfer towards renewables. They don't talk of renewables at all.

Rather, they talk of High Arctic Russia and of Azerbaijan. They hold forth about the Falklands and deepwater Angola. They dream of Sakhalin Island and Equatorial Guinea.

D is also for Denial.

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