Hamish McRae: UK's switch from net exporter to importer of oil will not have a dramatic downside

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The Independent Online

The UK is no longer a net oil exporter. Trade figures from the DTI yesterday showed the balance of trade in oil was in deficit in the third quarter, the first such three-month period of deficit since 1980. So after just a quarter-century the era of the North Sea's oil riches is drawing to a close.

Production will not collapse suddenly. Indeed we may well move back into a modest oil surplus for some months yet because the dip in the July/September period was partly the result of a summer of heavier-than-usual maintenance work. But the die is cast. The only issue is how quickly production will fall.

You can see the surge in production, coupled with the steady demand, on the left-hand side of the top graph. On the right-hand side are some projections from the US Department of Energy, which may well be wrong as to detail but which are not likely to be dramatically out. The downward slope of the curve could be made a bit less steep by improvements in extraction technology - getting a higher proportion of the oil that is there out. The only way in which they could be really wrong would be if there was a completely new set of discoveries. Since the North Sea and Atlantic approaches have been about the most trawled-over bits of the planet in the search for oil, this is really very unlikely.

So what does this mean? Well, it is not unexpected news. Already the country has become a net importer of natural gas and new facilities are having to be built to cope with that. But by the standards of other Western European nations, bar Norway, the UK will be in a relatively favourable position for another decade in that it will have a significant level of domestic oil production.

Nevertheless, the balance of payments - already in deficit - will be under gradually increasing pressure. Part of UK output will have to be diverted from consumption into exports to cover the cost of imported energy. Provided the economy continues to grow strongly, the impact on living standards will not be noticeable on a day-to-day basis. But over the years we will be a little poorer than we otherwise would have been.

So from a UK perspective, there is a downside but not a dramatic or immediate one. Were there no North Sea oil we would merely be in the same position as Germany, Italy or France: reliant on other countries for our oil needs.

From a global perspective, though, the decline of North Sea production means one less "safe" source of oil in a world where demand is projected to rise sharply. You can see from the two lower graphs what has been happening to demand and output in the two largest oil consuming nations, the US and China. The US has been a net importer since the early 1960s, while China became one in the middle 1990s. Among the world's largest economies, only Canada is now a net exporter of oil.

This will change the balance of power. Oil is of course by no means the only source of energy but it is the most convenient. Coal will play a larger role but is awkward to transport and unless dealt with very carefully has serious environmental costs. Gasification of coal can be done but is expensive. Nuclear power will have a role but can be used only to generate electricity. Unless there is a breakthrough in battery technology, its uses for transport will remain limited. Hydropower is clean but has serious environmental costs and the other "renewables" are tiny in relation to energy demand.

So who will gain? The obvious candidates are the countries of the Middle East, which will remain net exporters for the foreseeable future, and Russia. Less obvious candidates are the countries that can grow oil.

Until the development of the mineral oilfields of the US from the 1860s onwards, oil was indeed grown, as we grow it now for food use. Biodiesel is already in the UK market in a small way and on a much larger scale on the Continent. It is also perfectly possible to "grow" petrol, or rather its close substitute ethanol, from sugar. Brazil does. The question is cost: the price at which oil grown from crops substitutes for mineral oil. The US oil boom of the 19th century took place because it was much cheaper to extract mineral oil from underground and refine it than it was to grow oil crops and extract it. But at the present price it is beginning to become a realistic alternative.

This leads to some further conclusions. Countries that can grow oil crops will benefit at the expense of those that don't. So suddenly having a strong agricultural sector, which has almost been a disadvantage, becomes an advantage. The prime gainers will be Brazil, the world's lowest-cost producer of agricultural produce, the US if it can manage to contain its costs, and within Europe, France and Poland. From a UK point of view there may be some advantage: Britain is already the lowest-cost cereal producer in Europe and could presumably become a low-cost oil producer. Just which crop will prove the most effective is not at all clear, but the drift of the debate is set.

Of course all this is based on the presumption that oil will not only remain at its present price but that the price will trend upwards in the next few years. If oil comes down in price then the case will be much smaller - or rather the switch to biofuels will come later. That will depend on global supply/demand equations that are really very uncertain.

So the movement of the UK from being a net oil exporter to oil importer is just one landmark on a global progression towards the end of the era of the oil economy. Or rather the mineral oil economy, for the agricultural oil economy may well be in its early stages. The North Sea saga will be just a blip on the graph. Still, yesterday's trade figures mark an important transition. Remember the day.

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