Economic View: It's no barrel of laughs, but as Britain changes its behaviour, could we be insulated from oil shocks?

The sky darkened a little more last week, largely because of the further rise in the oil price and the implications for inflation and growth. Shares fell worldwide.

In the UK, the price of oil and gas was also one of the justifications given for another policy launch: plans to build thousands of wind turbines. The main stated objective was to meet UK obligations under the EU's carbon-reduction targets, but obviously the policy makes financial sense (or less nonsense, some would argue) if the price of oil and gas stays high. And yet, in the short term at least, an argument can be made that Britain is better equipped to withstand this oil shock than most other developed nations because, in relative terms, we are less dependent on energy imports.

As so often in economic matters, the glass is both half-full and half-empty. The half-full view first. As you can see from the left-hand graph, the UK was still a significant oil and gas producer last year. We are not a Canada or a Norway, but compared with other G7 countries we are well placed. Indeed, Canada apart, we are the only G7 country that is close to being self-sufficient in oil. Naturally any rise in energy prices increases inflation in the UK, as it does everywhere else, so we are taking a hit. We are affected directly because money spent on filling the tank is money not available to spend on other things. We are affected indirectly because higher energy prices hit global growth, including growth here. But relatively, we are not in too bad shape.

The half-empty view is evident from the right-hand graph. For several years we have been a reasonable net exporter of oil and we were more briefly a net exporter of gas. But now we have become a net importer of gas and we have been a net importer of oil since 2005.

A lot of debate focuses on the decline in UK production, with the Government hoping it will be slower than some of the companies project. The producers, for their part, tell the Government that if it cuts their taxes, they will invest more and be able to slow down the decline. What is not at issue, though, is that the decline is inevitable and the gap between demand and supply for both oil and gas will widen inexorably. You can push the production lines up a bit through greater investment and push the consumption lines down a bit through greater conservation, but you cannot change the shape of the big picture. Like almost all other developed countries we are going to have to import more of our energy.

That will put pressure on the balance of payments, even if the latest current account figures, out on Friday, were not too bad. During the first quarter of this year, the deficit narrowed to 2.4 per cent of GDP, from 3.5 per cent in the final quarter of 2007. You could say that we have got it down to something just about acceptable. But over the next few years we will have to make an adjustment of about half a per cent a year away from domestic consumption and towards exports just to hold the deficit stable. That may not sound a lot in one year but it is actually taking a chunk out of living standards that cumulatively will become noticeable.

So what can be done? It would be nice to think the wind farm programme will help and at the margin it will, but only at the margin. Suppose we succeed in getting 20 per cent of our electricity generating capacity from wind. Actual output would not be as high as that because, of course, wind turbines only produce power when the wind is blowing, so you would need power stations, probably gas-fired, on call to meet demand. But once they are in, any power from a wind turbine will cut the amount of gas we need to burn.

However, it will only cut the gas burnt in power stations, not the gas used in factories or in homes. On my back-of-an-envelope calculation, if all goes well we might save the equivalent of 0.2 per cent of GDP from the balance of payments. It helps, but as I say, only at the margin.

The way to improve the current account is to use less energy altogether. Can we? Well, yes. It may come as a surprise but we use less energy in total now than we did in the early 1970s. That has been the result partly of conservation but more the shift of the economy from heavy industry to services. In terms of the energy intensity of each unit of output, we are second lowest after Japan among the G7.

Looking ahead, that particular shift will be less help, largely because the pace of the move out of manufacturing towards services is likely to slow. On the other hand, on the straight conservation front, there is probably a lot more scope than we realise.

The big surprise of the past few weeks has been the fall in the demand for petrol and diesel as the price has risen. In the short term, people have been effective in figuring out how to use less fuel. We don't know how enduring this will be, though, for the shock of the cost of filling up the tank may wear off and commercial users of fuel have fewer options. Still, we have had a textbook case of the impact of a sudden price rise – a real-life experiment that no government could ever have staged – and it has taught us a lot about the price elasticity of demand (in the jargon) for a basic product.

This could be the start of something big. All the experience of conservation is that progress is incremental; it is the small things that make a difference. Once you have started to figure out how to save energy, it becomes easier to find the next way of doing so. Up to now, much of the Government's focus has been on the supply side: we will give you a grant for insulating your loft. As the price for all energy rises, expect a shift to the demand side. People will want to insulate their lofts (or whatever) because it will cut their heating bills. Big sudden hikes in utility charges have an impact that small incremental ones don't, and some huge increases are in the pipeline.

Meanwhile, the thing to appreciate is that as individuals it makes sense to change behaviour fast, while as a country we have a little time. The rise in the oil price hurts us less than it hurts most of the developed world. The rise boosts the Government's tax take – welcome at a time like this – and if we cut oil demand enough this year, it is just possible we will return to having a small surplus on the oil account. But it is a breathing space that should be used wisely and I hope we will do that.

Harness the rich to bridge the wealth gap

Two bits of data dropped into the inbox last week, both in their way disturbing. One was the survey showing that while some three-quarters of people in the UK felt that the gap between rich and poor was too high, there was little support for the Government trying to narrow it. The other was the World Wealth Report from Barclays and the Economist Intelligence Unit looking at the surge in wealth throughout the world, including the UK.

The first follows a report earlier this month from the Joseph Rowntree Foundation showing that the gap between the UK's rich and poor is as wide as it has been for 40 years. It found that households in already wealthy areas had become "disproportionately" richer compared with society as a whole. I don't think there has been any doubt about that, but the view that the Government should not intervene does represent a shift in opinion. A decade ago people did believe government could and should try and tackle it. Why the change?

The short answer is probably that people have lost faith in the "tax 'n' spend" model. Quite aside from the obvious resistance to stealth taxes, there is a widespread suspicion about the effectiveness of the welfare system. If that results in a switch in the direction of policy from trying to patch the effects of inequality to trying to stop it emerging in the first place, many will cheer. But I wonder whether the scepticism is also a reflection of the fact that there is clearly a global boom in personal wealth – what is happening here is part of something much bigger – and a rise in inequality in other countries too.

The Barclays/EIU report highlights that as the global wealth boom continues, the gap between developed and developing markets is closing. Over the next 10 years, China's number of very rich will accelerate it from 7th to 3rd place in the world, while India will jump from 14th to 8th place in the global wealth rankings. So inequality increases within countries but decreases between them.

Meanwhile, Britain's rich ranks will continue to swell. The report predicts that by 2017 there will be over 2.4 million households with assets of more than £1m, with a combined wealth in excess of £6.9 trillion, while there will be 126,000 households with more than £5m in assets.

Now you might say that after a week like the last one, these numbers look a bit optimistic, but maybe not. In any case it is clear that the middling rich are becoming a huge political force – look at the shift in inheritance tax by this Government. That leads to a further thought. Fight this force and you will lose; harness it to tackle the fundamental causes of inequality and there might be progress for all.