§ I presented my Budget last year at the end of a 12-month coal strike. I observed at the time that it was a remarkable tribute to the underlying strength of the British economy that it had been able to withstand so long and damaging a strike in such good shape. We now have to face a challenge of a very different kind. Over the past few months, the price of oil has almost halved, and with it our prospective North sea oil tax revenues and earnings from oil exports. In real terms, the price of oil is now back to what it was at the end of 1973.
Not surprisingly, perhaps, this initially caused a fair amount of turmoil in the financial markets, with sterling under pressure. I decided that it was right to respond with an immediate 1 per cent. rise in short-term interest rates 168 in early January, and this helped to prevent the downward movement of the exchange rate from developing an unhealthy momentum of its own. But equally I thought it right to resist the pressure, which for a time was very strong indeed, to raise interest rates still further. That pressure in due course subsided, and, though the financial markets remain somewhat volatile, the mood has changed considerably, assisted by a modest but welcome reduction in interest rates overseas.
Meanwhile, let me repeat that there is no question whatever, and never has been any question, of the United Kingdom cutting back its oil production in an attempt to secure a higher oil price. In the first place, the whole outstanding success of the North sea has been based on the fact that it is the freest oil province in the world—[HON MEMBERS: "We need to be."]—in which decisions on levels of output are a matter for the companies and not for the Government. In the second place, we are not only, or even principally, a major oil producer; we are also a major world producer and trader of many other goods and services, and a major oil consumer.
There is no overall United Kingdom national interest in keeping oil prices high. I am of course aware that a report, recently published in another place, and which attracted a certain amount of publicity at the time, predicted:
as the oil revenues diminish the country will experience adverse effects which will worsen with time"—
effects, it was said, of a most alarming nature. Had the authors of that report dreamed at the time they wrote it that half the oil revenues were about to disappear within a matter of months, their conclusions would no doubt have been even more apocalyptic. As the House knows, I have always believed their analysis, which was widely shared by Opposition Members, to be profoundly mistaken. Certainly, it will be put to the test sooner than anyone expected.
The United Kingdom is likely to remain an oil producer, of a gradually diminishing volume of oil, for the next 25 years or so. If we can survive unscathed the loss of half our North sea oil revenues in less than 25 weeks, the prospective loss of the other half over the remainder of the next 25 years should not cause us undue concern. [Laughter.]
§ Mr. Lawson
It is, of course, true that in relative terms we do lose from the collapse of the oil price—the really big gains will be made by the major non-oil-producing countries, such as Germany and Japan, where growth will be boosted and inflation, already low, is likely to fall virtually to zero.
Inevitably, we suffer a decline, too, in the value of our net oil exports. But the oil price fall will be beneficial for the industrialised world as a whole. Even for the United Kingdom, what we gain on the swings should, over time, more than offset what we lose on the roundabouts. In particular, I expect that the levels of economic activity and inflation will, if anything, be slightly better than they would have been without the oil price collapse.
What of the balance of payments? Thanks to the abolition of exchange controls in 1979, we have been able to use a good part of our earnings from North sea oil since then to build up a massive stock of overseas assets. Our net overseas assets have, in fact, risen more than sevenfold from £12 billion at the end of 1979 to almost £90 billion at the end of last year. This is a far bigger total than that 169 possessed by any other major nation, with the perhaps inevitable exception of Japan. The earnings from those assets will be of increasing value to our balance of payments in the years ahead—so, too, should the improvement in our manufacturing trade balance.
Although the British economy may not gain a great deal overall as a result of the oil price collapse, there will be considerable differences within the economy. The major potential beneficiary will be the international trading sector of industry in general, and manufacturing in particular, which is already enjoying both lower oil costs and a lower exchange rate against most of its major competitors, at a time when inflation is falling.
This provides British industry with an outstanding opportunity both to increase its exports and to reduce import penetration in the home market, but it will only be able to seize that opportunity if it meets two conditions. First, it must keep firmer control of its labour costs. Secondly, it must spend more of its much healthier level of profits on investing for the future in research and development and in training. Both the opportunity, and the responsibility to see that it is not thrown away, rest fairly and squarely on the shoulders of British management. Meanwhile, despite the massive fall in oil prices, I expect the current account of the balance of payments to remain in sizeable surplus this year, by some £3½ billion.
As I have indicated, there will be pluses and minuses within the economy. If industry is the main gainer, the main loser, at least today, is the Chancellor of the Exchequer. I can live with that, but it does mean that North sea oil revenues, which are likely to amount to some £11½ billion for 1985–86, are bound to be very much less in 1986–87. Indeed, on the assumption of an average North sea oil price for the rest of this year of $15 a barrel, which is close to the average published price for the past month of around $16 a barrel, oil revenues in 1986–87 will be virtually halved, at some £6 billion. This has obvious implications for the Budget, but the important fact is that, just as we successfully weathered a year-long coal strike, so we have been able to take the unprecedented collapse in the oil price in our stride.
We have been able to do so, first, because of the underlying strength of the economy in terms of growth, inflation and the external account; and, secondly, by virtue of the reputation we have earned over seven years for sound and prudent financial management.