Britain to face £8bn-a-year oil and gas bill

ALMOST £8bn a year may have to be spent on importing oil and gas by the end of the decade in a major challenge for whoever is Chancellor in the next Parliament.

An extraordinary windfall for the Treasury and the British economy for the past 30 years is coming to an end as North Sea reserves run dry and companies look to bring energy in from overseas.

Britain is set to become a net importer of gas this year, and of oil by 2009, and the repercussions could be huge. An £8bn bill is equivalent to more than 2p on the basic rate of income tax. North Sea production is declining as major fields in the region mature.

The UK Offshore Operators Association is hoping to manage the decline in output so that Britain still pumps out three million barrels of oil and gas a day in five years' time. But even then, it forecasts the annual import bill will be between £5 billion to £7.5bn.

UKOOA economics director Mike Tholen said: 'Energy is clearly going to climb up the agenda for whoever is Chancellor, whatever their persuasion.'

The trade equation is just one energy headache the Chancellor is likely to face as economists prepare for a new era of fuel prices, given the fast-growing Chinese economy.

Record energy prices and high electricity and petrol costs account for almost a third of the current inflation rate of 1.6%. Gas bills have shot up by 20% in the past 18 months, hitting consumers' disposable income at a time the City's money men are concerned about a slower retail sales.

Separately, figures this week showed sky-high oil prices drove up British manufacturers' costs at the fastest pace for nearly a decade in February.

The Chancellor's coffers are currently cushioned by the corporation tax and petroleum revenue duties levied on North Sea operators. The North Sea tax take is likely to be nearly £5.3bn alone in 2004-05.

Tholen argues that the British economy has also been sheltered by the weak dollar. 'If the exchange rate was at 2000 levels of $1.40 to the pound, we could have petrol at £1 per litre,' he said.

Britain's current account deficit is likely to be £28bn in 2004. Investec economist Philip Shaw said this shows the import bill could be a considerable thorn in the economy.

But he argues the main threat is in the US: 'If the price of gasoline remains high, there is a chance that it will begin to affect the pace of growth in America, and then that will affect the world economy.'