Every year we import and consume a vast amount of oil, the majority of which is burned in the engines of our cars. But right now EU member states are looking to take their positions on the "Cars and CO2" regulation. Traditionally the debate has been seen in purely environmental (and geeky) terms - but could driving fuel efficiency also provide a way for struggling EU governments to cut their structural deficits?
To put it simply, could we cut consumption, not the NHS?
For most EU countries - including the UK - oil is an economically significant import and some economists, such as Martin Wolf at the Financial Times, have argued that a balance of payments (aka trade deficit) crisis was the root cause of the Eurozone's economic woes.
The governments of southern European countries did not run massive deficits or have particularly huge debt pre-crisis. What they had was large trade deficits. That is, they were buying in more stuff from outside the country, from places like Germany, China and Saudi Arabia, than they were making and selling back to people outside the country.
If countries are not growing fast then imports are funded by eating into savings or by borrowing money. When the financial crisis hit, private lending stopped, which first cut household spending and then started to move debt onto governments.
Wolf's argument doesn't go into oil imports - but suggests that global trade needs to rebalance to tackle the long term causes of national deficits. Exporters need to import more; importers need to manufacture and export more. It makes sense - but it's incredibly hard to implement. Does fuel efficiency offer a partial, but surprising, solution?
Looking at the UK, Germany, and some of the troubled Eurozone countries, transport accounts for between half and two-thirds of total oil consumption in each country. In 2010 we used 51.1Mtoe (Millions of tonnes of oil equivalent) for transport in the UK, 37.4Mtoe of which was consumed on the roads.
Of course, the UK extracts and processes a lot of oil from the North Sea. However, it is not the right kind to cover our domestic consumption, so we have to import fuel for our cars and vans. This makes us an oil importer overall. Something that will only get worse as production falls off in the North Sea, which is already at half the level it was a decade ago. Furthermore, any UK oil we do consume is simply oil we could otherwise have exported.
To give a sense of the scale, if we had just imported this much as barrels of Brent crude, and set fire to them on the beaches as we landed them, this bonfire would have cost $20.4bn.
And the impact is greatest on those Eurozone economies with the highest deficits. Looking at the IMF data on the value of oil imports in 2010, in the UK we spent 2.46% of our GDP importing oil. While Germany spent a similar percentage, the figures for some of the struggling countries in southern Europe were much higher. Portugal spent 3.50%, Spain 4.23%, and Greece 5.97%.
Despite the on-going economic headwinds these figures rose in 2011 due partly to the higher price of oil. Last year in the UK our oil imports cost 3.26% of GDP. Portugal spent 4.19%, Spain 5.29%, and Greece an astonishing 8.05%. With the Greek economy shrinking, an ever greater share of their income needs to be spent on oil, rather than invested at home or even spent on buying goods and services from us.
Yet in Germany the figure hardly changed at all, remaining at 2.59% of their GDP, even with the price of oil almost doubling in two years. They managed to reduce their consumption of oil, and they did this while growing their economy, and virtually eliminating their deficit.
The problem for countries like Greece is that oil consumption is inelastic. As economies contract imports should also shrink - as households cut back on spending. Oil is not something we can easily cut our spending on - we've still got to drive to work.
If new efficiency rules meant we got more miles per gallon out of our cars, I know my wallet would feel heavier. But more than that, as a country it would reduce our trade deficit. If household disposable income is higher – it normally follows that tax revenues also rise. If people are less short on cash, welfare spending is lower. Generally there will be more money in the economy.
Some would argue that more efficient cars will mean less money for the Treasury in fuel duties. Here it's important to differentiate between the money we spend on oil – much of which goes on imports - and spending on petrol at the pump. Whilst it's true that cutting petrol use would cut revenues from fuel duty, the money otherwise spent on oil would be spent elsewhere, with its fair share ending up back in the Treasury.
Let's put this hard-nosed economic point another way. This year the IEA predicted that the US will become a net exporter of oil around 2030, with 45% of the reduction in imports driven by fuel efficiency measures for cars. So what can we do to improve the efficiency of our cars?
Some of this work is already on going, with EU legislation since 2007 having driven improvements of 4% a year, over five times what it was before.
But new American legislation is more ambitious, and we could do more here too. Currently the cars we are driving are doing 30-40 mpg, the same fuel efficiency as in the mid-90s. The new cars being produced are getting 54 mpg, with the aim of 76 mpg by 2020, but this could easily get to 88 mpg if we improve on the legislation.
The impact won't be immediate, but with politicians concerned about the 'structural deficit' - the amount of deficit left even if the economy returns to trend growth - leaving drivers with more disposable income to spend in their own economy seems sensible, especially for those hit hardest by the downturn.
The Energydesk team is away over Christmas so whilst the magic of technology allows these stories to be published in our absence we won't be able to respond to comments until 7 January - however we will then do our utmost to get up to speed. Many apologies in advance, Merry Christmas & Happy New Year.
