London Briefing: Soaring oil prices and declining output from the North Sea recently resulted in the UK running a trade deficit in oil for the first time since 1991, writes Chris Johns.

Commentators lamented the end of an era and forecast an inevitable prolonged decline in sterling as it loses its "petrocurrency" status. The fact that the overall trade deficit itself is rapidly increasing merely adds to the likely extent of the pound's fall.

But the implications of declining oil and gas production run far beyond the fate of the currency.

Oil in the North Sea was first discovered nearly 40 years ago, although its existence had been suspected by geologists for many years prior to that date. Small-scale production started in 1967 but things started to turn serious with the discovery of major oil fields in 1969; the giant Brent field was subsequently found in 1971.

The oil price that we see quoted on our screens today is often based on the Brent benchmark. Having access to huge reserves that would ultimately turn the UK into an oil exporter provided scant protection from the global recessions that followed the two OPEC crises of the 1970s.

The discovery of North Sea oil had plenty of unforeseen consequences, not least of which was an appreciation of sterling that many people at the time blamed for the woes affecting the manufacturing industry. The then chief executive of British Leyland, a company doomed to disappear like so many others, famously suggested that we would have all been much better off if the oil had been left in the ground.

Suggestions that the UK should establish a trust fund, like those set up in Norway and Canada, to invest the tax bounty from oil production were met with refusals from the Treasury. The civil servants argued that it made more financial sense for the country to pay down its debt with the extra revenue, rather than make investments in assets with uncertain returns.

We will never know if they were right, but the cynics among us suspect that much of the oil bonanza was blown on wasteful public expenditure. North Sea oil generated in excess of £200 billion (€294 billion) for the exchequer and attracted a similar sum of inward investment

In the early 1980s, the received wisdom amongst many commentators was that the oil would run out by the end of the century. That we are still pumping oil, albeit at a diminishing rate, is a reminder that all such forecasts should be treated with care.

Some people think the life of the North Sea could be prolonged much further if extraction technology improves the current recovery rate of around 50 per cent of proven reserves. As others have suggested, it does seem a shame to leave half the oil in the ground.

Some experts have suggested that, by 2020, we will be facing a return to the energy crisis - and power cuts - of the early 1970s. The Institute of Civil Engineers warned some time ago that we face having to source 80 per cent of the gas to fuel Britain's power stations and homes "from politically unstable countries thousands of miles away". That was more a comment about diminishing domestic gas supplies than oil, but it makes the point that Britain - and much of the West - faces some uncomfortable strategic choices.

The focus on sterling's petrocurrency status is misplaced. The pound didn't enjoy much of a boost for long: Norman Lamont on the day of sterling's ejection from the ERM would have loved some independent currency strength derived from oil.

Luckily, the implications of diminishing oil output will not hit all at once; there is still some oil left. Thanks to the reduced importance of manufacturing and some conservation, we actually consume less oil today than we did at the start of the 1990s; oil now contributes only 1 per cent of tax revenues. Oil production is important, but needs to be kept in context.

Some historians of the oil business blame the 1986 collapse in prices (to less than $10 a barrel for a while) on the increased output coming from the North Sea. With that output in decline, they see a reversal of fortune for the oil price and a reason to expect it to stay high.

That might encourage companies to get more out of the North Sea - small comfort if the world economy now goes into another oil-price-induced recession.