The UK is facing a 1970s-style “oil price shock” that could wipe ￡45 billion (US$72.9 billion) from the UK economy, British Secretary of State for Energy and Climate Change Chris Huhne said in his first intervention on the issue since the start of the Middle East political crisis.
Rising oil prices pushed gasoline to a record ￡1.30 per liter at British pumps this week and turmoil in the Middle East is leading to intense pressure on British Chancellor of the Exchequer George Osborne to ease the pressure on motorists, probably by dropping previously announced plans to increase fuel duty in the budget on March 23.
However, in a speech on the impact of the oil crisis on Thursday, Huhne said that a price of US$100 a barrel for oil transforms the economics of climate change in Britain.
He disclosed that the British Department of Energy and Climate Change’s economists have said that if the oil price rise turns into a 1970s-style crisis, the cumulative loss to the UK economy would be ￡45 billion over two years.
Oil is at a two-and-a-half-year high and there have been predictions that if the political turmoil spreads around the Persian Gulf, the price would rise further. The Libyan rebellion has shut down oil production in many parts of the country and while Libya’s oil fields produce only about 2 percent of global demand, experts say the disruption is putting pressure on world supplies.
“If the oil price doubled, as from US$80 last year to US$160 this year, it could lead to a cumulative loss of GDP of around ￡45 billion over two years. This is not just far-off speculation: it is a threat here and now,” Huhne said.
The speech was in part an attempt to galvanize public support for tough measures to create a green economy after recent setbacks, including attacks on the science of climate change and stalled international negotiations.
The speech could also be seen as an attempt to burnish the coalition’s green credentials after months in which the British Department for Transport has declared an end to the “war on the motorist.”
Drawing on research conducted for the Labour government by Lord Stern, Huhne said US$100 a barrel is seen as the point at which the economics of climate change pivots so that it becomes cheaper for British consumers and businesses to invest in green technology than remain with the status quo.
He said that if oil only reached US$108 a barrel by 2020, as predicted by the US Department of Energy, then the UK consumer would “win hands down” by paying less through low-carbon policies than for fossil fuel policies.
This is the moment to invest in green infrastructure, homes and transport, according to Huhne.
Fossil fuels are now the costly, high-risk option for energy: It is “crazy” not to -prepare for a low-carbon future.
He said the government had made it possible for consumers and businesses to switch to green energy, through the green deal for homes, feed-in tariffs and new technologies, such as electric cars, which are predicted to have a breakthrough year this year.
In the low-carbon economy, Huhne said, “we will turn to electricity to heat our homes and charge our cars, leading to a doubling in demand for electricity by 2050.”
Steve Holliday, chief executive of the National Grid, predicted this week that the UK would need to increase its installed capacity of electricity generation from 75 gigawatts to 100 gigawatts by 2030.