Disappearing oil the importance of oil to the UK balance of payments was clearly seen in Table 10.6. Unfortunately, the future may be less comforting in this respect! In September 2003 imports exceeded exports of oil for the first time since August 1991.The turnabout from a £400m surplus in August 2002 to a £63m deficit in August 2003 helped to widen the trade gap to a record £3.9bn in September alone. The overall current account deficit with the rest of the EU, where much of the oil goes, also reached a monthly record of £2.2bn. Over the July-September 2003 period the UK has been spending 3% more than it is producing. September 2003's oil shortfall was a blip, the Office of National Statistics claimed, as important refineries were out of use for maintenance. Crude oil production is estimated to have recovered to 2.17m barrels per day (bpd). However, the UK Offshore Operators Association predicts a bleak trend for oil production in the UK. North Sea oil output peaked at 2.9 m bpd in 1999, but is expected to be just 1.6m bpd in 2008. At recent prices, the balance of payments would then be about £4bn a year worse off, eliminating regular monthly oil surpluses. Before North Sea oil and gas, the UK used to run an annual trade deficit of between £2bn and £4bn on fuels. Recently, there has been a surplus of about £6bn. interestingly, the situation would be worse for the UK but for China! China's rapid economic growth, estimated by some at around 10% per annum, has caused a surge in demand for raw materials and energy to produce its explosive growth of output. That in turn has increased the demand for oil, which is estimated to be around 6m barrels of oil per day, up 10% on 2003.

Question

1 How serious are these projected reductions in oil output for the UK balance of payments?

2 What other implications might this have for the UK economy?

3 What policy responses might the UK government consider?