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4. North Sea Oil and the Decline of Manufacturing

Published online by Cambridge University Press:  26 March 2020

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Abstract

P. J. Forsyth and J. A. Kay have recently argued, in a widely quoted article, that the enjoyment of the benefits of North Sea oil is only possible if there is a contraction of manufacturing output. Their argument has been mis interpreted in some quarters and it is here re-examined and placed in a wider context. The note was written by G. D. N. Worswick.

Type
Articles
Information
National Institute Economic Review , Volume 94 , November 1980 , pp. 22 - 30
Copyright
Copyright © 1980 National Institute of Economic and Social Research

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References

page 22 note (1) Fiscal Studies, July 1980.

page 22 note (2) Besides the article in Fiscal Studies already mentioned, there is a fuller exposition in IFS Working Paper no. 10. We have drawn on both sources.

page 23 note (1) We suppose all oil to be homogeneous and its price to be fixed by OPEC in dollars. We further assume that the dollar price is not affected by any decision of UK, whether to produce more or less oil or to sell abroad or at home. The sterling value will, of course, vary with the sterling/dollar exchange rate. By assuming homogeneity we neglect the fact that North Sea oil is of higher quality than the average of earlier UK crude imports; this is for simplicity's sake; the quality difference brings some additional gain to the UK.

page 24 note (1) In the figures presented by FK the only absolute fall shown is in manufacturing. Their large sector called ‘dis tribution and services’ shows a small increase in production of 0.9 per cent. However a substantial part of distribution and services is clearly non-tradeable. As a rough measure we have taken out gas, electricity and water, distributive trades, and public health and educational services, treating all other components as tradeable. On this basis and following exactly the FK procedure we find that corresponding to the fall of 5.7 per cent in the output of manufacturing there would have to be a fall of 2.3 per cent in tradeable services. Inadvertently FK have left the impression that it is only manufacturing which might be threatened with absolute decline in their illustration.

page 25 note (1) De-industrialisation, edited by Blackaby, F. T., NIESR Economic Policy Papers 2, Heinemann Education Books 1979.

page 26 note (1) Part of the North Sea oil effect will show up through the balance of payments variable itself. But, as FK point out, the rate may rise further, in the expectation of growth of North Sea oil output.

page 27 note (1) Our own macroeconomic model (NIESR, 1979) indeed has these properties of stability.

page 29 note (1) Lecture to Royal Economic Society 24 July 1980, ‘The monetarist counter—revolution—an appraisal’—forth— coming in Economic Journal, March 1981.