Why not Nationalise Grangemouth refinery?

Twice in the last couple of days, I’ve been asked to talk to the Media about Grangemouth. Twice I’ve been asked the same question by the BBC: Should it be nationalised? The first time I was surprised by the question, and answered with waffle about there not being a case for the refining business, but the petrochemicals plant is important as the centre of a manufacturing hub. The second time I ducked it completely. “not my area of expertise”.

Strategic infrastructure?

This is cowardice on my part. Of course Grangemouth shouldn’t be nationalised. The manufacturing businesses surrounding Grangemouth will have to find other sources of supply or close. Tough, but better than the alternative, even though this manufacturing hub makes up 10% of Scottish GDP. The problem is the refining and petrochemical business suffers from overcapacity accross the whole of Europe. This is in part because Governments sometimes have seen refineries as “strategic” and intervene whenever they get into trouble, and in part because of simple competition from newer, bigger refineries and petrochemical plants elsewhere, particularly in Asia and the USA.

You’ll see a lot of waffle in the media about “fuel security”. The best security is having multiple sources of supply, and being rich enough to afford the prices of market fluctuations. Of course it’s nice if your domestic supply can be exported, but even this has problems. You’ll also see fearmongering about petrol prices. There was little noticable effect on petrol prices from the strike in 2008. While there may be disruptions to supply to forecourts in remote areas of Scotland, the fuel companies are likely to have contingency plans, and any disruption is likely to be short-lived and local. Remember the biggest fuel store in the UK is that in everyone’s car. But the main reason this won’t affect prices is because we already import nearly half the UK’s diesel, and export 20% of petrol. The supply chain is already diversified and robust.

European refineries built after the war produce too much petrol, demand for which is falling thanks to more efficient cars, fewer miles driven and a switch to diesel. They produce too much fuel oil which no longer heats our homes and powers our industry, the cleaner, cheaper gas does. They produce too little diesel and aviation fuel, which the UK must import. We struggle to find a market for our glut of petrol and fuel oil, because everyone’s refineries have the same problem. And there are simply too many of them in Europe.

Grangemouth is not the only European refinery closing this week. Mantova in Italy has also been mothballed. European refineries, old, with a nameplate capacity of, in Grangemouth’s case, 205,000 barrels of oil a day, which is turned into stuff for which there is no market. It’s unsurprising they’re struggling against big, new American and far-eastern refineries which have capacities over twice that. American refineries pay (at present) $15 or more less for their crude (the WTI/Brent spread) too and produce the stuff the market (currently) demands.

If the plant is nationalised, the Government (whichever one, Scottish or British) will have to pick up the tab for a business currently losing £150m a year, with a pension fund £200m in deficit. The plant is said to need £300m in investment to set the plant running to produce what the market actually demands. So we’re looking at a measurable, whole-integer percentages of the Scottish Government’s budget of £27bn, when they’re already running a 10% deficit. Good luck sustaining that.

The difference between Ineos and the Scottish Government is the former has lots of experience in building, running and managing petrochemical plants. The Scottish Government has none. It’s impossible to conceive of Alec Salmond running a nationalised petrochemical business better and more profitably than private sector managers. I doubt the Scottish Government (soon to be independent?) could find the money to wear the inevitable losses in perpetuity without cutting back elsewhere. So everyone in Scotland will have to pay taxes to keep 800 people in jobs and be much poorer as a result of the direct transfers.

Then there’s the precedent. Having secured nationalisation for “key infrastructure”, which is what the unions want, they will want to get the same result for every other big business which starts to find the competitive pressures of the Global economy a bit much. With the back-stop of nationalisation for any factory employing 500 or more Scots, unions will be tempted to drive a harder bargain. Scotland becomes a little less profitable, and receives less and less investment each year as a result.

Because investment drives productivity, and productivity drives wages, Scots will find themselves getting poorer if the Government caves in to Unions’ demands. The laws of compound interest mean this happens slowly at first. But Scotland lacks the resources of the UK’s diversified, trillion-dollar economy to stand the pressure for long. Even with the resources of the UK, it took massive “nationalisation of the means of production” less than 30 years to cripple Britain. The Scots are far, far to the left of the rest of the UK, and British business after the war was profitable to start with. If they get what they, and the BBC appear to want, nationalisation, the Scots will see why nationalisation doesn’t work much, much quicker than that.

So next time I’m asked “should Grangemouth be nationalised?”. I’m going to say “No. Of course not, though there’s a case for helping with the investment needed, but I don’t think even that’s a good idea”.

1 reply
  1. Paddy Briggs
    Paddy Briggs says:

    Grangemouth refinery is not a strategic asset of consequence and the petrochemical facility even less. If refineries in Britain can be run profitably fine – let them do so. If not, finel as well. The products of an oil refinery are commodities that are plentifully available from a wide variety of sources. A refinery converts crude oil into these products at an operational and environmental cost. If the refiner's margin (the difference between the cost of the crude + processing and the realised value of the manufactured products) is positive then fine. Keep on refining. If, for whatever reason, it isn't then stop and buy the refined products on the open market.

    One of the reasons the refiner's margin might not be positive is because the operating costs are too high. Too many staff paid collectively too much for example. Another might be if the environmental costs as a result of local or national laws are too high. It might sound harsh (it is) but however good the workforce and excellent the facility if it costs too much producing undifferentiated commodities then it is not viable.


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