In June, London-based auctioneers Christie’s expects to raise £100,000+ selling Margaret Thatcher’s famous Asprey handbag. It’s the bag often carried by the Iron Lady on foreign trips and gave rise to the term “hand-bagging”, a term used by the British press to describe Mrs Thatcher occasional style in political debate with other national – mostly European – leaders.

If its value weren’t quite so high, it would be worth the investment of UK energy insiders who might consider using it to knock some sense into the heads of those having anything to do with formulating current coalition energy policies.

North Sea Windfall tax

In July last year I wrote a piece North Sea Oil’s New Boom that set forth plainly how decades of dark mutterings about oil and gas resources running out in the North Sea had proven wildly inaccurate, and how, time and again, human ingenuity and new technologies consistently create new energy prospects and new investment opportunities. All very positive, you might think. Enter Big Government to screw it all up as the Conservative-led coalition steadily adopted energy policies that can only derail the North Sea oil and gas boom, de-stabilize the wider economy and – if the latest figures are to be believed – threaten national power cuts much earlier than the 2014/5 date previously predicted.

Chancellor George Osborne claimed his March 2011 Budget was designed to make Britain a “world-class place to launch new businesses”. While UK industry leaders generally applauded (as did I) Osborne’s general pro-business measures, waves of shock quickly registered among energy execs – and later economists able to grasp the full implications of Osborne’s anti-oil and gas actions.

The first shockwave was felt by the North Sea oil and gas industry when Osborne’s Windfall tax increased the supplementary charge to North Sea producers from 20 to 32 percent. The tax would raise, so Osborne claimed, about £2bn ($3.3bn). Independent observers, however, maintain the figure would be nearer £10bn ($16.5bn). The idea was to allow him to afford the over-burdened UK taxpaying road users – who pay 70p in every £1 paid at the pump direct to government – some relief by cutting 1 pence in the duty on petrol. Not that anyone actually felt the benefit anyway as, within days, the reduction was quickly swallowed up among the oil price spikes stemming from the troubles in the Middle East.

Osborne asserted that the tax was imposed on North Sea producers because “it’s our oil, not theirs”. True enough. But getting the tax balance right without attracting an extraction industry response of “get it out yourself then”, isn’t easy to achieve, and Osborne appears to have pushed the industry too far. The problem is that finding new, smaller fields that the oil giants ignore in the light of the new tax regime, significantly squeezes profit margins and shareholder dividends for the smaller developers. The Big Oil players including ExxonMobil, ConocoPhillips and BP have felt the pinch, having to re-think current strategies. Norwegian Statoil was among the first to freeze $10bn prospective investments in two UK oil and gas fields in the light of the UK Budget tax increases. Not surprising, given that producers from fields opened pre-1993 paying 75 percent in tax are now expected to pay 81 percent. Companies opening fields after 1993 who had factored in tax rates of 50 percent now find themselves expected to pay a 62 percent rate. North Sea oil and gas had been anticipating further investment of £60bn over the next decade. Most of that is now in question. And given that gas trades at about half the price of oil, the impact of the tax is only magnified as far as gas producers are concerned.

In March economic consultants Deloitte announced that North Sea drilling activity was down for the first quarter of 2011 by 25 percent. While publication of the latest figures is plainly too soon to be affected by the Osborne tax rises, analysts at Deloitte clearly believe the tax steep rises “could set the pattern for future activity” precipitating a steep decline in drilling in the second half of 2011.

Estimates suggest that around $1 trillion worth of recoverable reserves lie below the North Sea in an industry that employs around 500,000 people directly with more in associated industries. Above all, what this second-generation North Sea energy boom offers to the UK – and is now threatened – is an annual contribution of £30bn ($50bn) to the balance of payments, with a further £6.5bn ($10.8bn) generated through other industry taxes.

World’s first carbon levy

If derailing a potential second-generation North Sea energy boom wasn’t enough, the British Chancellor’s March Budget set out draft steps towards a “£16 a ton floor price for carbon” – the world’s first nationally-imposed ‘hidden’ carbon levy. As the tax is not to take effect until 2013, the potentially disastrous effect for business and domestic users is only just being grasped. From 2013, every Briton will be forced to pay a ‘hidden’ carbon tax of £16, rising to £30 per ton in 2020. The cost will add billions of pounds to the cost of UK electricity bills not least because of the extra cost that will be incurred by Britain’s ageing coal-fired power stations and through gas usage. All told the effect is expected to push up UK electricity prices, already the highest in Europe, by a further 25 percent. British industrial competitiveness will clearly suffer, especially among its energy-intensive industries.

And that’s not all.

Britain’s unexpectedly lengthy and cold winter in 2010-11 (the second in succession) has additionally meant that the country’s six major power stations supplying one fifth of the nation’s electricity needs have already used up over a half of the 20,000 running hours each has been allotted before they were forced to close under EU rules. Britain’s procrastination over building a new generation of nuclear stations, with the forced closure under EU regulations of its high CO2 emitting power stations now threaten national power cuts

as early as 2012/3. But even if power stations were to make it through to 2013, they will cost over £600 million ($1bn) more to run because of the government’s new carbon tax. Meanwhile British energy policies persist in prioritizing subsidized onshore (100 percent) and offshore (200 percent) wind power that only produce a pathetic return, around 2 percent of Britain’s electricity – except in high pressure cold spells when they produce nothing at all.

In my piece last year (see link above) I spelled out a North Sea ‘new boom’ for the British economy. In it I made the case for how Britain’s market-led energy strategy could be “extrapolated across the globe”. Cancel that. Extrapolate instead that market-interfering politicians need a lesson in the link between energy and wealth creation. Not to mention – for failing to understand basic economics – a good “hand-bagging”.