Readers Question: How reliant is the UK economy on oil?

There are two ways of considering this question – the consumption and production of oil.

• Firstly, how much does the UK need to consume oil to maintain economic activity? Could we survive in a post-oil economy?
• Secondly, how important is the UK oil industry and the production of oil?

Consumption of oil

This shows that we are consuming a steady 1.5 to 1.7 million barrels of oil a day. Oil is an essential raw material for many key economic activities, such as:

1. Transport – cars, lorries e.t.c. mostly rely on petrol / diesel. (In the US transport accounts for 66% of all oil used. I imagine it is a similar statistic in the UK.)
2. Production of plastic
3. Fertilizers
4. Asphalt
5. Polyurethanes
6. Solvents
7. Electrical generation

Reducing dependency on oil consumption

1. There have been some attempts to reduce the dependency on oil. In transport, the government have encouraged the consumption of electric cars, with subsidies and encouraging electric car charging points.  But, between between 2010 and June 2013 only 5,034 electric cars have been registered. It is a small drop compared to the total number of cars sold.
2. According to Calor, there are 160,000 LPG registered cars in the UK, and the number is on the rise.
3. Energy efficiency. Cars have become more energy efficient with a high miles per gallon becoming a strong selling point. This has limited the growth in demand for petrol.
4. Alternative forms of transport. Some see alternative forms of transport as a way to avoid reliance on oil based fuels. However, despite growth in cycling rates and increased use of trains, cars  / lorries still dominate the UK’s mode of transport.

However, the improvements in energy efficiency and attempts to introduce alternative fuel cars are only limiting the growth in demand for oil based fuel.

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Irish national debt – the total amount of Irish government debt.

Irish national debt has increased to 117% of GDP in recent years because of a large financial bailout to Irish banks, deep recession which saw a 20% drop in nominal tax revenues, and continued weakness in GDP growth which has made it difficult to reduce debt to GDP, despite government spending cuts.

Source: cso.ie

The Total Irish Government debt 2012 Q3 – €190,954 million – (117% of GDP)

Irish government debt millions

See also: stats at ECB (Debt based on – Maastricht assets/liabilities – General government (ESA95) – European Commission – All sectors without general government (consolidation) (ESA95)

 Irish government spending

The peaks in spending in 2010 were related to the Irish government bailout of banks. After the bailout, the government has pursued spending cuts.

Example of spending cuts from 2012 budget at Telegraph

Ireland 2012 budget

– €2.2bn of the €3.8bn of fiscal consolidation is on the spending side.

– Capital expenditure will be cut by €755m, while current spending cuts to contribute €1.4bn. (includes public sector pay, welfare payments, education and health care)

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Stats on EU Bond Yields and Debt.

See also: Primary budget Deficits of EU

EU Bond yields 2010 – 2012

ECB Long term Interest rates

EU Bond Yields 2010 – 2014

2010-2012 – Why did Bond yields on Eurozone debt rise, but yields on UK debt fall?

One significant cause is that the ECB won’t / can’t act as lender of last resort and buy government bonds. Therefore markets fear a liquidity shortage in Eurozone and so are reluctant to hold bonds.

Further reading:  EU debt crisis explained

Related

• Italian debt crisis and economic problems
• France National debt

See also:

• Long term EU bond yields at ECB
• EU Debt crisis explained

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A look behind the causes and consequences of the economic crisis, and why it has been difficult to solve.

Background to Economic Crisis

The 1990s and early 2000s was a period of economic prosperity – Low inflation and high economic growth gave an impression of economic stability, but in other areas of the economy there were signs of boom and bust.

• Housing Bubble. In US and European countries, there was a rapid rise in house prices, which caused a boom in house building and bank lending. In the US, the housing bubble was helped by a boom in mortgage lending. Banks began lending mortgages to people with little regard for their ability to pay back. (housing boom and bust)
• Bank Lending Bubble. In the bubble years, banks became more aggressive in lending. They would borrow money on money markets to be able to lend more profitable mortgages. Banks became highly leveraged – high amount of debt to assets (deposits) This left them vulnerable to a downturn in the economy.
• Growth Financial derivatives. The financial boom was helped by a new range of financial derivatives, such as credit default swaps and CDOs. These enabled mortgage companies to sell on their mortgage debt to other banks around the world. This enabled mortgage companies to finance a larger range of new loans.
• See also: Understanding financial crisis
• See also: What went wrong with US economy

Credit Crisis

• From around 2006, US homeowners started to default on their mortgage because of a modest rise in interest rates. House prices started falling. Therefore, banks and mortgage companies started to lose money on their mortgage debt.
• Because of mortgage defaults in the US, banks around the world started losing money and stopped lending to each other.
• Full explanation of understanding credit crunch in 22 steps.

Economic Recession

• The credit crunch led to a fall in bank lending. This led to a decline in investment and lower consumer spending.
• Also confidence was badly affected by news of bank failures. Consumers became more risk averse and sought to pay off debts rather than spend.
• Falling house prices also led to a negative wealth effect and lower spending.
• In 2008, rising oil prices also led to falling living standards, though this was quite minor.
• The scale of bank losses were very high so there was a substantial fall in lending.
• Despite cuts in interest rates, and expansionary fiscal policy, consumers were reluctant to spend because they were highly indebted. Also, despite low-interest rates, banks didn’t or couldn’t lend because they were short of cash.
• This could be caused a ‘balance sheet recession’ which tends to be longer lasting.
• See: causes of recession, with video on 2008/09 recession

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