Jeremy Warner's Outlook: Don't hold your breath on new nuclear build as Government turns lukewarm again

Oil still has the power to shock; OFT under pressure to refer Man Utd

Britain's nuclear renaissance, much talked of ahead of the election, seems to be on the backburner again. Just three months back, there was much excited talk in the nuclear industry of how the Prime Minister and his Government were swinging behind the case for new nuclear build as a way of meeting ambitious targets for reductions in greenhouse gas emissions.

A leaked DTI briefing document seemed to confirm the existence of a blueprint by suggesting that any incoming government would be wise to get the nuclear decision out of the way early in its new term of office, as it might prove too controversial to tackle later with an election looming. Supporters of nuclear power will be disappointed to learn that this advice has already been as good as rejected.

At his monthly press conference yesterday, Mr Blair admitted that he was in no position "to give an answer on whether it is ever possible to get back into this nuclear debate. Maybe it isn't". Concerns over cost and public acceptability would have to be answered first, he suggested. On neither count is there much cause for optimism.

A report published yesterday by Oxera, an independent economics consultancy, finds that rates of return would not be high enough as things stand to attract commercial investment. Any programme of new nuclear build would therefore have to be underpinned either by direct Government subsidy, or through long-term contracts that would guarantee a set rate of return for nuclear output.

The latter mechanism has already been used to encourage the development of renewables. Theoretically, it could be extended to nuclear, even if any such plan would have other electricity generators screaming unfair competition. But are the public prepared to pay such a premium? With news of more leaks at Sellafield, the environmental case for nuclear is far from won.

Recent studies by the nuclear industry paint a more reassuring picture. The next generation of nuclear design is cheaper, more efficient, produces less waste and, perhaps most important of all, costs a fraction of the price to decommission, it is claimed. Even so, after British Energy, which went bust during a period of low electricity prices, the private sector would be unlikely to back new nuclear build without some form of government subvention.

And if Mr Blair favours an early nuclear debate, his Secretary of State for Trade and Industry, Alan Johnson, plainly doesn't. His view is strongly that renewables should be given a chance first. Many wind farm plans would be abandoned if it was thought the Government was about to press the button on new nuclear build. Mr Blair says he doesn't want to see the debate shut down. Yet there will be no proper debate at all unless the Government is prepared to take a lead. If even the Prime Minister is reluctant to do so, the nuclear lobby might as well pack its bags and head for China, where there's no public opinion to convince or argument to win. Thirty new stations are already planned there.

Oil still has the power to shock

Do oil prices still have the power to shock? The answer is a powerfully affirmative one, but not in the way they used to.

At $60 a barrel and apparently heading higher, the real price of oil (adjusted for subsequent inflation) is close to the peak seen during the first oil shock of the mid 1970s, though it is still less than half that of the second shock during the early 1980s. In the past, policymakers have tended to focus on the inflationary effects of rising oil prices; today, it is the deflationary effect that most worries them.

That's not to say that rising oil prices no longer have an inflationary effect. Plainly they do. You only have to look at petrol, gas and electricity prices to see it. Yet the wider inflationary effect whereby producers of other goods would pass on their higher energy costs, which in turn would trigger an inflationary increase in wage demands, seems much less marked.

There are three main reasons for this. One is rapid industrialisation in Asia, which has created overcapacity in some industries. A second is the offshoring phenomenon, which has allowed companies significantly to reduce their labour costs to compensate for higher oil prices, and a third is the growth of migrant labour, which in Britain at least has helped keep the lid on wage demands. Even on the Continent, with its less flexible labour markets, offshoring, or the threat of it, has had a powerfully deflationary effect on wages.

The upshot is that companies are finding it more difficult to pass on their increased energy costs than they have in the past. Instead, they are being forced to counterbalance increased energy prices by taking the axe to other business costs, in particular labour. If allowed to go unchecked, this process would fast manifest itself in lower demand.

High oil prices tend to act like a tax on consumption. More money spent heating your house or filling the petrol tank means less money for other things. For all net importers of oil, the effect of higher oil prices is to take money out of the economy. North Sea oil production protects the British economy to some degree, but even here we are already seeing a deflationary effect. The consequences for Continental Europe are much more serious. Why the European Central Bank hasn't already acted with lower interest rates is a mystery to all, but that's another story.

All previous oil price spikes have culminated in a recession, which in turn leads to a collapse in demand during which the oil price will return to more normal levels. That the cycle hasn't yet followed this familiar pattern is largely down to industrialisation in China and India, which has created a powerful new source of demand both for oil and just about everything else.

For how much longer can this continue? A marked slowdown is already apparent in Britain and if it is less obvious in Europe, that's only because the core of the European economy never really speeded up in the first place. Asia and America continue to boom, but even in these regions, most lead indicators are now pointing downwards.

Two members of the Bank of England's Monetary Policy Committee voted for a rate cut at the last meeting. The odds are that they will soon be joined by others, with the markets again factoring in a quarter point cut in rates by Christmas and another shortly thereafter. Only Mervyn King, Governor of the Bank of England, seems still to worry about the upside risk to inflation. He might still be right, but it is the deflationary, not the inflationary effect of a high oil price that is exercising just about everyone else. The world has indeed changed.

OFT under pressure to refer Man Utd

Perhaps you didn't know that Birkbeck College, part of the University of London, has a Football Governance Research Centre. This may or may not be a good use of taxpayers' money, but in an apparent attempt to justify its existence, Professor Christine Oughton, the Centre's director, has written to the Office of Fair Trading demanding that Malcolm Glazer's bid for Manchester United be referred to the Competition Commission.

A football club, she contends, is in effect a monopoly, as the fans that support it cannot go anywhere else to buy their product. Mr Glazer's plan to hike ticket prices by 54 per cent over the next four to five years is therefore an abuse demanding public scrutiny.

I can't agree. If Mr Glazer puts his prices up to a level which the market won't stand, or alienates the club's supporters, he'll destroy his business. This is unfortunate for those who think Manchester United more important than life itself, but in the greater scheme of things, it is of no importance at all. Other clubs and support networks will step into the breach. Still, passions are high, and Sir John Vickers, chairman of the OFT, is under a lot of pressure. If he doesn't refer, he'll be accused, as I have before, of being a surrogate Arsenal fan.