How Britain caught the “Dutch Disease” and never recovered

In economics there’s something called the “Dutch Disease” (not to be confused with Dutch Elm Disease, something gardeners might know about). It’s called the “Dutch Disease” because in the Netherlands in the 1960s, discoveries of vast natural gas deposits in the North Sea caused the Dutch guilder to rise, making exports of all non-oil products less competitive on the world market. Thus, what should have been a massive benefit for the country actually resulted in business closures and job losses.

So what? Well, I’ve had a little look at what happened when Britain started producing oil and gas in the North Sea

Here are the UK’s revenues from North Sea oil and gas (click to see more clearly)

You’ll see a massive spike from about 1978 to 1986 and then another spike from 2004 to 2011. These two spikes will have been due to two things – the world oil/gas prices and the quantities produced.

Now let’s look at unemployment in the UK (click to see more clearly)

You’ll see a big spike in unemployment from 1978 to 1986, exactly when oil and gas revenues were at their highest. In Britain in the 1970s, when the price of oil quadrupled and it became economically viable to drill for North Sea Oil off the coast of Scotland, Britain became a net exporter of oil and the pound soared in value, but the country fell into recession as exports of other products became uncompetitive, businesses collapsed and people lost their jobs.

Britain caught the “Dutch Disease” and much of the government’s revenue from the oil and gas was wasted paying for a massive army of the unemployed rather than being reinvested in building new industries.

“Wait a minute”, you might say. “while what you’re saying may be true for the period from 1978 to 1986, the second big spike in revenues from 2004 to 2011 wasn’t matched by a rise in unemployment, therefore the theory about Britain catching the Dutch Disease falls apart”.

But remember the two charts I showed you yesterday about how successive governments had used disability benefits to mask the real level of unemployment (click to see more clearly)

Of course, there are other reasons why unemployment rises and falls. But what I think we’re seeing is that Britain definitely caught the “Dutch Disease”, most of the government’s income from taxes on the North Sea was squandered and we have virtually nothing to show for the hundreds of billions of pounds of oil and gas produced.

Truly we are ruled by idiots.

(Sorry if today’s post was a bit theoretical. But hopefully some readers will find it interesting)