Hervey Gibson: Britain must rebalance its energy supply and demand

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WHEN we gave a qualified welcome to Chris Huhne's electricity reform white paper two weeks ago, we pointed out that electricity is only 18 per cent of Britain's energy story. The other 82 per cent is even more dire: Britain's strategic energy position is worse than post-nuclear Germany's will be.

However, because our situation is evolving from natural tendencies rather than dramatic parliamentary votes, no-one is facing up to it with anything like the same directness.

Concern focuses on the grand issues of carbon, fuel prices and security of supply, but not on the simple fact that the supply and demand figures no longer add up.

Apart from two shorts spells, Britain's primary energy balance has been in decline since 1911. A long-time perspective is important. Energy sources need lots of investment and take years to get online, production eventually reaches a peak and then output dwindles.

The abundance of energy resources - primarily coal - was one of the reasons Britain gained and retained its leadership of the industrial revolution. After taking off in the 18th century, Britain's coal production peaked at 178 million tonnes of oil equivalent (mtoe) in 1913. Coal output is now less than 10 mtoe.

Nuclear energy came along in the 1950s, but "peak nuke" was in 1998, at 23 mtoe, and output is now less than half that. North Sea gas production began in the mid-1960s, and "peak gas" was in 2000 at 94 mtoe, but is now below 60. Oil started up in 1975, and Britain's peak oil year was 1994, with 132 million tonnes produced, but output is now only 60 million.

So, except for gas, which is dropping fast, all our primary fuel outputs have fallen to less than half their peak. Renewables, though rising, are too small to be seen on a graph with the naked eye at less than 1.5 per cent of consumption.

What have these peaks and declines in production done to the energy balance? Until the start of the Second World War, the UK had a surplus of energy, but after 1950 the demand began to outstrip the supply.

The gap grew due in equal measure to rising car ownership and declining coal production. This was not too serious an issue until 1973, because energy could be cheaply imported and new domestic sources were being brought forward.

Then Opec raised oil prices. North Sea resources didn't take off quite fast enough to save Britain's financial imbalances so, under chancellor Denis Healey, the UK economy came to be supervised by the International Monetary Fund.

Putting this oil equivalent story into money terms, from 1911 to 1975, an energy surplus of 2 per cent of GDP fell progressively away to a deficit of nearly 5 per cent. Between 1975 and 1983, the North Sea reversed that into a surplus of more than 2 per cent.

The country stayed in comfortable energy surplus through peak oil output in 1994 and peak gas output in 2000, carrying on until mid-2004.As oil production has since slid downwards, the balance has slipped again. George Osborne's Budget accelerated it and last month's lowering of the offshore ring-fence helped very little. By 2009, Britain's energy consumption exceeded its production by 50 per cent.

Figures from the Department of Energy and Climate Change let us track it month by month. It looks like a trend that is not for turning. At 2.5 per cent of GDP, the energy gap is equal to the total UK trade imbalance. Now the deficit is again approaching the Healey/ IMF territory. The physical difference is 65 mtoe, growing at about 7 mtoe per year. At current oil prices and exchange rates, this amounts to 33 billion a year, growing by at least 3.5bn a year.

In May 2010, Prime Minister David Cameron described his strategy for Britain as one of rebalancing the economy from financial services towards manufacturing. If and when it comes, it will have to deal with more than manufacturing and services. Much of Britain's economic imbalance is a matter of energy.

• Hervey Gibson is chairman of Cogent Strategies International and former head of economics at Scottish Enterprise.

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