ABSTRACT
The development of the oil and gas sector affects the economy in three main ways. There are the direct effects, there are effects on industry and there is the policy response of the government. The direct effects have been discussed in Part I of this book. They consist of such things as the contribution of oil and gas to the gross domestic product, the balance of payments effect, and the direct employment effect. The immediate changes in industrial structure flowing from the development of oil have been considered in Part II of this book. These are largely brought about through changes in the exchange rate and involve shifts in the relative size of various productive sectors as well as changing employment patterns and increased consumption levels. The third channel through which North Sea oil affects the economy is the main concern of this part of the book. It consists of the response by the government in terms of its general economic policy. The arrival of oil production on a big scale makes it easier for a government to follow expansionary policies, if that is desired, because the oil greatly improves the balance of payments and supports the exchange rate. If, however, the government wishes to follow a restrictive economic policy aimed at curbing inflation, it will welcome and not offset the appreciation of the exchange rate which results from oil production, and will use the revenues from oil taxation to tighten its fiscal stance rather than to expand demand.
