By Matthew Lynn Bloomberg
17-09-04
You don’t know what you’ve got till it’s gone," sang Joni Mitchell. For the UK, it might be North Sea oil. In July, the UK recorded an oil deficit of £ 61 mm ($ 109 mm) -- its first oil shortfall for 13 years. Earlier, the government’s National Statistics Office announced a trade gap in goods of £ 5.2 bn for July, slightly more than economists had expected.
Oil was only a small part of the deficit, yet it may turn out to be a
significant component.
Ever since the big offshore oilfields in the North Sea were developed in the 1970s, Britain has been a net exporter of oil. A healthy oil surplus has been one of the strengths of the British economy for so long that most people take it for granted.
If Britain remains a net importer of oil, that has two main consequences.
First, the pound may not stay strong. The oil surplus has been one reason for
the strength of sterling. And, if the UK currency falls as oil wells dry up, the
rest of the British economy will suffer as well.
"Together with the unexpected weakness of the industrial production numbers
released earlier, these figures are a clear warning that if activity in the
consumer and housing sector continues to slow down, the UK economy could be left
without a leg to stand on," said Paul Dales, an economist at London-based
consulting firm Capital Economics.
Oil helped rescue the British economy from the mess of the 1970s. Could it also be what ends the economic revival?
From nothing, Britain became a major producer of oil and gas through the 1980s
and 1990s. The first oil, from the Argyll Field, came ashore in 1975. Output
grew steadily, and, until recently, it was a fast-growing industry.
According to the UK Offshore Operators Association, a trade group representing
the industry, British oil production peaked at 2.8 mm bpd in 1999. Gas output
reached its zenith in 2000.
The UK was the fourth-largest gas-producing country last year and the
11th-largest oil producer. For gas and oil production overall in 2002, the UK
came in seventh, just above Mexico, and below Norway and Iran.
The UK has been self-sufficient in oil for 20 years, and in gas for 10 years.
That won’t last for the rest of the decade, according to the Offshore
Operators Association. The latest figures would suggest that the trade surplus
is coming to a close faster than many people thought. The Offshore Operators
Association predicts combined oil and gas production will decline to 2.5 mm
barrels by 2010, compared with 4.2 mm in 2002.
The North Sea is well-explored territory, so it seems unlikely that there will be massive new strikes to change that outlook.
What does that mean for the British economy? Well, the British won’t be
pouring vegetable oil into their cars, or chopping up their furniture for
firewood. Even after 2010, the UK will still be producing some of the oil it
needs. And the country is wealthy enough to buy the rest.
Still, that doesn’t mean the decline of the oil industry isn’t significant.
Clearly, any form of industrial decline is bad, and oil is no exception. It will
hit the local economy of Aberdeen, Scotland, the hub of the British oil
industry. It will be painful for the British government, which has grown used to
enjoying the high taxes generated from oil.
The North Sea has contributed £ 195 bn, measured in constant 2003 prices, in
taxes since the mid-1960s. In recent years, taxes have averaged about £ 5 bn
annually, according to the Offshore Operators Association. The gradual loss of
that income will have to be recouped with higher taxes elsewhere.
It will expose the British economy to the vagaries of the global oil market.
Britain has been insulated by the strength of its oil industry. So, when the
price of crude climbs, consumers may suffer, yet the industry benefits, so, on
balance, the economy has generally come out ahead. From now, the UK will be hurt
by soaring oil prices, along with most world economies.
The big issue is sterling. What will happen to the pound without oil to prop it up?
The pound is no longer a "petrocurrency" as it was for much of the
1980s. It doesn’t move up and down with oil prices. Yet sterling’s strength
-- even with the UK’s trade deficits -- has been one of the reasons for the
country’s recent prosperity. It keeps the inflation rate low and allows
consumption to grow faster than production, enabling the economy to expand
faster than it otherwise would.
As oil production slides, the trade deficits will widen. At some point, the
markets will notice -- and sterling will be punished. When that happens, the
economic weather will suddenly get rougher.
Source: Business Day