§ In the United Kingdom just over half our energy is, at present, provided by imported oil, a rather lower proportion than most other industrial countries. It follows that, but for the immediate industrial disruption, we are better placed than most of our overseas competitors such as Japan, France or Germany. Furthermore, in the years to come our situation will be fundamentally improved by the increasing output of alternatives to imported oil—more nuclear power, more North Sea gas and, above all, by North Sea oil. But this cannot affect 1974, and it is the economic policy for the British economy in 1974, with our 50% dependence on imported oil, which we have to consider.
§ With all the uncertainties of the Middle East situation, it is impossble to predict, for the 12 months ahead, either the price the United Kingdom will have to pay for imported oil or the amount which will be made available to us. But it is already inevitable that the price will be very much higher than in the first nine months of this year and that the supplies will be less than we need. The unanswerable questions are "How much higher" and "How much less than we need".
§ The extra cost of oil to our balance of payments is a severe blow. Our balance of payments was in considerable deficit before this oil situation developed, although there was then reason to believe that, as the effective depreciation of sterling worked through into the balance of payments, the deficit would begin to improve next year.
§ A deficit was expected and has been financed in large degree by overseas borrowing by the public sector. But international borrowing will now take on an entirely new dimension for the world as a whole. From some of the talks I have had, there is emerging, I believe, a general consensus that the industrial nations as a group must expect to some extent, to borrow back the money to pay for this increase in the price of oil, rather than to join in 15 a self-defeating deflationary or protectionist race to counteract the effect of the price rise on the current balance of each individual country. But in our case, given our substantial deficit without the oil problem, some corrective action now needs to be taken to keep the prospective total deficit within acceptable limits.
§ But the problems created by the rise in the price of oil coming on top of the rise in world prices of other commodities—severe as they are—are overshadowed by the uncertainties about the volume of oil which we will received.
§ It has to be remembered that the levels of supply to which the Arab producers refer are those of certain months in 1973. But on our original forecast of the growth of the economy, our oil needs in 1974 would have been 5 per cent. greater than this reference level.
§ We must now accept that output in 1974 is likely to be significantly below the levels for which we were hoping, although no worthwhile estimate of GDP can be made until it is possible to forecast energy supplies. The present troubles affecting coal, transport and electricity are bound to reduce output in the early weeks of the year. As for oil, the best estimates are that a 10 per cent. shortfall is the most that can be coped with without loss of output. If, in 1974, oil deliveries were more than 5 per cent. below those in the reference period in 1973, this would amount to a shortfall of more than 10 per cent. compared with our needs. If over the year as a whole, the oil cuts were to turn out to be 15 per cent. there would be a fall in GDP rather than the 3½ per cent. growth which we had in prospect.
§ In this situation two points must be stressed. First, we do not know, and we cannot at this stage know, what energy supplies will be available throughout 1974. More than in any other period, therefore, it is essential to be prepared to act again as circumstances change or clarify. The second important point to stress is that oil shortage on the scale which seems possible could mean that, while the shortage lasts, we might have to accept the 16 living standards of say a year ago rather than the improvements which we could have expected in the year ahead. To recognise that is to do no more than to face up to the realities of the situation.
§ Some cut back in personal consumption will result automatically through short-time working and temporary unemployment. But the fall in output will be greater than the fall in demand, because of course those who are unemployed will spend their social security benefits, and many consumers will reduce their rate of savings. If nothing is done there will be pressure of excess demand which will draw down stocks and hold back exports.
§ In this situation the Government has decided to take steps now to reduce demand by some £1,200 million in the coming year. These steps are in my view the most appropriate that can be made at this time, but the uncertainties are unprecedented and I will not hesitate to take further action at any time if developments should require it.