How Does The Price Of Oil Affect The UK Economy?

As a leading industrialised nation, the UK has always had a strong dependence on the use of oil. However, oil has been an especially important factor in the strength of the UK economy since the 1960s, when the country began to develop strategic reserves found off its shores in the North Sea.

From Dependence To Large Scale Producer

Britain's oil industry has its early origins in the development of shale oil in Scotland in the mid-19th century. In the early 1900s, a team sent to Persia by British venture capitalist William D'Arcy was successful in finding oil in the Masjed Soleiman region of what is now modern Iran. That set the stage for the creation of the Anglo-Persian Oil Company, which later became the UK's premier oil company British Petroleum, or BP.[1]

The national efforts for WWI and WWII required greater development of local resources, and the country introduced legislation to promote exploration under the ownership of the British crown. The first onshore oil in England was discovered in 1919 at Hardstoft in Derbyshire, and other discoveries around the country followed from there.[1]

Until the 1960s, Britain produced only about 3,000 barrels per day, and most of its oil was imported. However, following the discovery of large oil and gas deposits in the Netherlands' offshore Groningen province in 1959, exploration began in the southern region of the North Sea near Britain.[1]

After the passage of the UK Continental Shelf Act in 1964, the UK began development of its offshore oil reserves. Oil production in the North Sea topped 1 million barrels per day by 1978. Seven years later, the UK became a net exporter of oil, with the surplus reaching the equivalent of 2.7% of GDP.[1]

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A Key Sector

The UK has approximately 380 oil- and gas-producing fields.[2] More than 90% of the UK's production occurs at its offshore fields. As of 2015, domestic oil production currently meets about 50% of the UK's demand, and oil and gas supply more than 70% of its total primary energy needs. According to the UK's Department of Energy & Climate Change (DECC), that should remain the same through at least 2030.[3]

Oil production reached a high of around 2.7 million barrels annually in 1999, but it has fallen and leveled off since. UK production is currently at about 1.1 million barrels per day, or around 400 million barrels annually. Revenues from oil production were £4.7 billion in 2014, falling from £12.4 billion in 2009 due to lower prices and output.[3]

Britain's oil industry has directly and indirectly employed up to 500,000 people around the country. However, the recent declines in oil prices caused the sector to currently employ around 375,000 people, according to the Oil & Gas UK trade association. That is approximately 0.6% of the country's population of about 64 million people.[3]

According to the government, the UK has proven and probable reserves of about 5.4 billion barrels along with possible additional reserves of 2.5 billion barrels.[3]

Windfall And Slump: The Price Of Oil

Oil reached more than US$115 per barrel in 2014, but it has since slumped to lower than US$50. There are varying opinions about why the price of oil has fallen dramatically. Some analysts attributed the drop to a glut of oil, prompted in part by new supplies brought about by shale oil production, particularly in the U.S. Others have attributed the movement of oil prices to the strengthening of the USD amid a movement by the U.S. Federal Reserve to raise interest rates.[4]

The UK's oil is expensive to develop. because of its large offshore component. With the price of oil in decline in 2015, many of the oil producing assets in the region have begun to be de-commissioned.

As mentioned earlier, staff employed in the industry has fallen from 440,000 in January 2014 to current numbers around 375,000, primarily as a result of the crash in global oil prices. Even so, Britain's offshore oil and gas industry has seen a rise in production of 3% in 2015. Industry officials, however, have warned more jobs could be lost and further funding cuts may be expected before the slump in the industry is over. As a result, they have called for tax cuts to help cut costs while promoting new investment and profits.[5]

As a large producer and employer in the economy, the oil sector has also traditionally contributed a large amount to the country's tax revenues. Revenues from the UK's Corporation and Petroleum Revenue taxes were negative by 39 million in the first six months of 2015, however, because of the oil price slump.[6]

Impact On The Current Account

One major influence of the oil sector on the economy, and the value of the pound, has been its impact on the country's current account balance. The UK is the largest producer of oil and gas products in Europe, and the oil sector has in recent years contributed up to £50 billion annually to the country's balance of payments by reducing energy imports.

Since 2005, the UK has been a net importer of oil products and its current account deficit has been widening in recent years as a result. In 2014, it reached 5.9% of GDP, up from 3.5% of GDP in 2012.[7] In the last decade, the UK was able to cover its current account deficit more thoroughly with incoming investment, but that trend has waned. Since the financial crisis of 2009, the country's deficit in investment has outpaced the deficit in goods and services.[7]

A Resilient Economy?

At the outset, the decline in the price of oil since 2014 would appear to have a negative impact on the UK's economy, given that the country is a large oil producer. As oil has contributed to the country's balance of payments, lower prices and lagging oil production could induce a weakening of the pound.

However, the country remains a net importer of oil products, and some recent studies have indicated that the local economy could actually benefit from declining oil prices through at least 2020 as this may spur greater investment in sectors such as manufacturing, transportation and services. Meanwhile, factors beyond the oil industry have been more pronounced in determining the  trajectory of the pound. Large stimulus packages in Europe, low European interest rates, and ongoing debt and budget crises in Europe in recent years have been seen stimulating a move by investors toward the GBP.

Even with some decommissioning of oil production facilities in the UK due to the low price of oil, local analysts have expressed some optimism about oil's contribution to the UK's economy ahead. Oil prices are expected to rebound in the coming years from their lows in 2015.[9]

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.



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