2 Effect of Changes in Oil and Gas Prices and Production on UK Balance of Payments
In 2005 the UK produced around 125 million tonnes of oil and 80 million tonnes of oil equivalent (Mtoe) as gas, a total 205 Mtoes. The outputs of both gas and the oil are reliably expected to fall (the government estimates their field lives as 12 years each in the 2006 Blue Book).
The following table gives the effect on the UK’s balance of payments over the period to 2020 on the assumption that
(a) UK consumption of fossil fuels is unchanged at 183 Mtoes in 2006.
(b) UK coal production and imports remain at 38 Mtoes as in 2006.
(c) optimistically, UK oil and gas production declines only to an average of 50 and 30 Mtoes in the period 2015-2020.
(d) the oil price is (optimistically) held to 90$ per barrel by 2012 and 110$ by 2017.
(e) the pound gradually reduces to $1.50 by 2017 more in keeping with its purchasing power parity (PPP) as defined by OECD.
Table 2: How Oil and Gas effect Balance of Payments
| Year | UK consumption Mtoes | UK production Mtoes | Net exports (imports) | £/$ | $ per bbl | £/tonne(7 barrels per tonne) | Net export value (import cost) Bn | Difference from 2006 |
| 2006 | 183 | 207 | 24 | 0.5 | 72 | 250 | 6 | 0 |
| 2012 | 183 | 140 | (43) | 0.57 | 90 | 359 | (15) | -21 |
| 2017 | 183 | 70 | (103) | 0.67 | 110 | 516 | (53) | -59 |
3 Capital, Finance Accounts and the UK’s International Investment position
Like other countries, Britain has overseas assets held by its residents and companies, and liabilities held by foreigners mostly in respect of their assets in the UK. Changes over 20 years in these assets and liabilities are shown in Table 3.
Table 3: Assets and Liabilities £Bn
| Year | 1985 | 1995 | 2005 |
| Assets | 594 | 1552 | 4837 |
| Liabilities | 523 | 1565 | 5006 |
| Net Assets | 71 | -13 | -169 |
| Change from 1985 | 0 | -84 | -240 |
| Balance of payments Net | 2 | -4 | -26 |
| Cumulative B of P from 1985 | 2 | -122 | -287 |
Note 1
It is fashionable among many economists and financial commentators to adopt an insouciant attitude to the balance of payments current account deficit, saying as Nigel Lawson once said that the deficit can always be financed by borrowing (as with individuals).
This is undoubtedly true in the short-term, say 1 or 2 years, but Table 3 shows that for 20 years now we have been as a country in a continuous loss position in our overseas earnings and expenditure.
Allowing for the relatively large errors in recording current account flows (order of £5 Bn) Table 3 shows a close match between cumulative B of P losses and the reduction in our net assets – a decrease of £12 Bn per annum on average over 20 years – 20% of our GDP in fact.
Note 2
Even the National Statistical Office’s Pink Book in 2006 was moved to comment, “in recent years the UK has needed to borrow from abroad to finance a continuing current account deficit”. This has resulted in the increase in UK net liabilities shown in Table 3 and is a direct consequence of a decrease in net income by the banks, which mainly hold the liabilities, as shown in Table 1 at B(3). This in turn, as with individuals, will worsen the UK B of P position which will show up as a further decline in net assets, less investment net income – and so on.
Note 3
Reference is frequently made to foreign investment as an offset to the current account deficit. In fact this has only happened once in the last 10 years (1998) and once in the previous 10 years (1987).
In any case, foreign investment increases the UK’s liabilities, it mostly consists of UK asset sales, and once sold an asset cannot be sold again – hardly a provident basis for running either a country’s or an individual’s finances.
The worsening of the oil and gas position (Table 2) will of course only make things dramatically more serious.
Note 4
88% of UK overseas bank deposits are held in foreign currencies. Likewise 85% of foreign bank deposits in the UK are held in foreign currencies so these liabilities are fairly well hedged against exchange rate changes.
S F Bush
25 June 2007
Footnote
[1] Credits from UK companies’ investments overseas and debits from foreign owned companies in the UK.
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