In November 2008, in the churning black depths of the global credit crisis, Prime Minister Gordon Brown decided it was time for a trip.
Leaving the winter weather and Downing Street behind, he charted a course for sunnier, sandier climes, with a gaggle of ministers in tow.
Having encouraged UK banks to engage in subprime lending (remember 125% loan-to-value sub-prime mortgages? Good times)…
… pressured the regulator that he created not to stop it…
… nationalised Northern Rock when the bubble burst…
… and then having rolled out a half-trillion pound bailout for the rest of the banks when the trouble didn’t stop there…
… Gordon decided it was time for nations in the Gulf to start ponying up some bailout money. After all, they produced oil. And of course, it was oil that was the real problem here. As he said shortly before his departure, less than a month after the first bailout package:
It is a tragedy that the world is prey to one volatile commodity that can disrupt businesses, disrupt people’s lives, by a trebling of prices over a very short period of time…
The price at the petrol pump is coming down and it should come down faster. The oil price trebled, and people paid a huge price for that. The oil price has [now] halved, and I want people to get the full benefit of that, and I want that to be fed through to people…
More people [are] shaking their heads when they go to a petrol station and find what the price of petrol has gone up to as a result of oil prices. Now oil prices are going down and this is our chance to get a stable energy market.
Cheering a fall in oil prices caused by the global economy collapsing requires an interesting strain of optimism. But in a crisis, you really just have to misdirect the public count your blessings, I suppose.
I’ll let you dwell on “Gordon’s optimism” over the weekend, but in today’s letter I’d like to highlight a different aspect of the story.
Gordon didn’t get any bailout cash from the Gulf countries – ironic, considering those countries effectively used to be what drove the value of the pound itself. From AngloArabia: Why Gulf Wealth Matters to Britain by David Wearing:
… maintaining the strength of the pound sterling was an absolute strategic priority for British policy-makers in the post-war era, and Britain’s interests in Gulf oil were crucial to London’s success in this regard.
A strong pound benefited Britain’s financial services sector (then even more important given the destruction of British industry during wartime) and was a key symbol of Britain’s enduring prestige. Middle Eastern oil, as produced and sold by British oil majors – the Anglo-Iranian Oil Company (AIOC, formerly Anglo-Persian), in which the government had a 51 per cent share, and Royal Dutch Shell, in which British capital had a major stake – was indispensable for two reasons.
First, taxes from AIOC and Shell and oil supplies via those firms from states within the sterling area such as Kuwait and Iran helped Britain to maintain a healthy balance of payments. Second, AIOC’s and Shell’s sales to states outside the sterling area helped earn precious foreign exchange, which could purchase essential imports or be held in reserve to defend the pound in times of crisis…
Control of Gulf oil, its secure passage through the Suez Canal, and the sterling reserves of the producer states were therefore vital to the strength and prestige of the pound in those precarious post-war years.
It’s incredible how much things can change in a half century or so. Especially if you lose superpower status during that period.
With large swathes of global oil supply priced in pounds, those requiring it needed to exchange their own “softer” currencies for GBP, strengthening the currency and the institutions who could use it as an international tool, like the Treasury, the Bank of England, and Downing Street.
This made the pound a “petrocurrency” at the time, just like the dollar became after it (though I can’t find any old references to the terms “PetroPounds” or “PetroSterling”).
But while so far in human history it’s the form of energy called petroleum that has moulded currencies after its name and created these powerful economic dynamics, it doesn’t have to be the only one.
Hydrogen, as my colleague Kit Winder tells me day in and day out, is the future of energy. And Britain’s resources when it comes to the supply of it are substantial. Interestingly, plenty of old oil rigs around this country are in the process of being repurposed for the harnessing of hydrogen.
If the UK gets ahead of the game, developing hydrogen infrastructure and extraction… could we see the rise of “HydroSterling”, where the pound strengthens due to dominance in hydrogen exports?
Eoin Treacy will be sending you his latest research on the topic tomorrow: he’s calling the hydrogen developments in this country “Britain’s Second Coming” – a rebirth, a revival – hell, a second chance – at growing Britain’s economic strength on the global stage.Â
The Foreign Office’s death threats: when and why
Thanks for playing to all who wrote in with your answer to Wednesday’s question. I’m afraid none of you got the right answer, so I’ll be holding on to the beer for a moment.
It was in trying to defend that Gulf oil-backing to the pound which drove the Foreign Office to tell the US State Department that it would kill American citizens.
“[It’s] got to be Suez, they grassed us to the Egyptians”, wrote one reader.
Well, you’re not too far off – but you’re not right either.
Interestingly, Anthony Eden, who was PM during the Suez Crisis, was in charge of this mess too. But it happened two years earlier, when he was foreign secretary.
It started in 1952, when the Arabian-American Oil Company (ARAMCO), supported by Saudi troops, occupied an oasis called Buraimi on the border with Oman to prospect for oil. This was seen as an affront to the Omanis and the UK government, who were also interested in the possibility that oil reserves could be harvested from the location by British oil companies.
The US government was not involved in the initial planning of the incursion, but would not waver in its support for its primary allies, the Saudis. After two years of negotiations and increasing pressure, the Foreign Office threatened the US State Department with seizing the oasis with force and killing any Americans found therein.
Ultimately, no such force was required to settle the dispute, and the Saudis left later that year, in August 1954.
It scarred UK-Saudi relations for the next eight years, but more importantly it set the stage for the US-UK showdown two years later in the Suez Crisis, where the US decided there was only room for one Western superpower in town, and forced a British military retreat using financial weapons.
You can go on holiday to the Buraimi Oasis now if you fancy it. Don’t worry, it hasn’t been turned into an oil field – it turned out there wasn’t any oil there.
Wishing you a good weekend,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates