Friday, 21 February 2014

What could fracking do to our trade deficit?

George Osborne says our economic recovery is not secure [1] and we aren't exporting enough which suggests he is worried about our trade deficit and is another reason for him to be keen on fracking in the UK. The trade deficit is the difference between the value of exports and imports. In a healthy economy they ought to be about the same, or in surplus - the Euro area is currently in surplus. However, the UK has been in deficit since 1984. An increasing proportion of this is due to importing oil and gas - if we could get a significant proportion of our gas from fracking how much difference would that make?




The latest trade figures we have are for 2012. In that year our overall trade deficit was about £34 billion but that is made up of several parts. There was a massive £108 billion deficit in goods mostly offset by a surplus in services, particularly insurance and finance.

The deficit due to energy including oil, gas, coal and electricity was £22 billion. This is up from a £5 billion surplus ten years ago, partly due to falling production from North Sea oil and gas and partly due to increasing prices. The price of imported fossil fuel has increased by a factor of 4 over the last 9 years. The second chart shows the change in deficit due to energy over the last 10 years (in $ purchasing power parity to allow for global market trends). Food is another significant component of the goods deficit and this has risen too but not nearly as fast - energy has now overtaken food.

The largest part of our energy deficit is due to oil but some is due to gas. The net deficit for gas in 2012 was £6.8 billion.

This is likely to get worse as production from the North Sea continues to decline - down by 44% over 5 years to 2012. Oil production is slowing too but much more slowly than gas.

Gas from fracking could offset some of this decline. Fracked gas probably won't be any cheaper for consumers but it will bring in taxes and go some way to protect our balance of payments: gas comes to 20% of the overall deficit and that could increase signficantly if prices continue to increase.

Renewable energy also reduces the need for imports, plus renewable energy prices are less uncertain because they are not tightly coupled to global markets - you need electric cables to trade wind and solar energy rather than just ships or pipelines. On the other hand, wind farms produce electricity but two thirds of our gas use is used for heating, not for electricity. It is going to take a long time to convert significant numbers of homes to heating with something other than gas even if we had enough renewable electricity to replace it.

Also, oil and gas production bring in more tax revenue because there are specific taxes including a 20% supplementary charge whereas renewable energy does not, though companies that generate it pay tax on their profits. Fracked gas also has tax breaks compared to offshore production.

For most of us the best way to protect ourselves from world energy prices is to use less of it. In fact this is beginning to happen. Total final energy consumption was 6.4% lower in 2012 than in 2010. The only problem with this strategy is that it reduces our GDP and government tax revenues. Call me cynical if you like.

[1] Economic recovery is not yet secure, says George Osborne (Telegraph, 20 Feb 2014)
[2]United Kingdom Balance of Payments - The Pink Book, 2013 (ONS, 2013) - mainly chapter 2.
[3] Digest UK Energy Statistics (www.gov.uk, 2013)
[4] PPPs and exchange rates (stats.oecd.or)
[5] A guide to UK and UK continental shelf (HMRC)
[6] George Osborne reveals 50% tax break for fracking firms (Independent, July 2013)

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