September 14 update

Firstly let’s get the partisan stuff out the way. Portland strongly believes that Britain is “Better Together” and sincerely hopes that Scots vote to stay part of Great Britain on September 18th. This view is partly forged from a lifetime of summer holidays on the West Coast of Scotland (42 summers and counting) but also based on a career that over the years has resulted in many periods “North of the Border”.

The politics of independence is the usual ding-dong affair between Nationalists (pro-independence) and Unionists (anti-independence), but when it comes to the economics of independence, the subject of oil is never far away. Over the last 18 months, the Nationalists have done their upmost to paint a picture of an independent Scotland where oil is only part of a balanced economy made up of manufacturing, technology and financial services. But the facts would say otherwise. In 2012, the Oil & Gas industry (crude oil, natural gas and refined products) accounted for over 50% of Scottish exports and without the sector, Scotland would be running an annual budget deficit in excess of £20bn. Scottish Independence and oil are inextricably linked and it is no coincidence that nationalism only really came into the popular Scottish psyche in the early 1970s, when North Sea oil had just been discovered and the slogan “it’s our oil” began to get traction.

Back in October 2013, we looked at the downstream oil industry in Scotland (Grangemouth strike, Compulsory Stocking requirements) and that was complicated enough, but the issues around North Sea Oil make the downstream industry look like child’s play. Firstly there is the thorny issue of who the oil belongs to. Depending on which boundary lines are used (fishing regulation, maritime law, UN demarcation or ancient legal frontiers), most experts agree that around 75% of North Sea oil lies in Scottish waters. But this seemingly simple measurement ignores the fact that British government money was used for the initial geological surveys, British tax incentives were used to incentivise oil company investment and British government grants were used to build the offshore logistics structure that runs from Montrose up to Peterhead. Nor does the 75% figure take into account that much of the oil sits off the Shetland Islands and the Shetlanders have a very different view of independence to their mainland counter-parts. They also have used their oil royalties to create a mini-Sovereign fund that they are hardly likely to cede to a newly formed Scottish government (they haven’t yet handed it over to the British government in 30 years of asking!). And finally, when commentators talk about North Sea oil what they really mean is North Sea Oil & Gas and rightly so, because most energy forecasts predict gas demand comfortably outstripping oil over the next 50 years. But when it comes to gas, the tables are turned as circa 60% of North Sea gas sits in English waters.

Nonetheless, oil and gas proceeds still sit at the heart of the Nationalist plan and high levels of ongoing tax revenue will be crucial if they are to create the society (some say utopia) that has been set out in their referendum manifesto. Scotland already spends about £3,000 more on its people than any other part of the UK and post-independence (according to campaign promises), that figure is to increase so that public spending per head will be circa 25% more than in England, Wales and Northern Ireland. No wonder the vision presented by the Nationalists is so popular amongst the less well-off!

This extra money can only realistically come from the North Sea and here the Nationalists have made some pretty risky assumptions on oil prices. But the truth is that income from oil can never be guaranteed and no prudent government would sensibly rely on roller-coaster oil prices to build a new nation state. In the first 5 years of Scottish Independence, it is totally feasible that the world could be faced with another financial crisis and oil prices could plummet to below $50 per barrel. It has happened in the very recent past – in 1999 oil prices were $15 per barrel, in 2005 they were at $50 and at the end of 2008 oil prices were $35. If these events happened again for anything other than a short period of time, then the economics of Scottish Independence would be utterly blown out of the water.

That being said, Portland has long maintained that oil prices will remain high and will even go higher as the world’s population grows. So it would be insincere of us to argue against the pro-independence position on oil prices, however risky they may seem based on historical precedent. What is far more reckless is the Nationalist position on future North Sea production levels. In 2008-09, tax revenue from North Sea Oil was £12bn, but by 2012-13 and with oil prices still high, revenues had dropped to £6bn. All industry predictions show declining production going forward – irrespective of the price of oil – so when the Office for Budget Responsibility (an independent body) predicts tax revenue of £3bn by 2016-17 and the Nationalists predict $7bn, something is amiss. Plus if the oil fields are nearing the end of their working lives, then consideration has to be taken of the massive costs (billions) involved in the environmental remediation and decommissioning of exhausted oil fields – the cost of which one assumes will fall to the newly created Scottish State.

That North Sea oil will provide a nascent Scottish state with tremendous economic clout is without doubt. But overwhelming reliance on a declining industry, in a sector as fickle as energy is a dangerous game indeed. And take a perfect storm of low oil prices, reduced production and spiralling decommissioning costs and you can kiss goodbye to increased public spending, let alone the proposed idea of a rapidly endowed Sovereign Wealth fund (a la Norway). Yes, there is enough oil to ensure that an independent Scotland would not be the economic disaster that some have claimed, but equally nor will an independent Scotland be the economic panacea that the Nationalists claim. In fact the pro-independence groups have been disingenuous in presenting the offshore industry as a stable and non-shifting entity – something it is blatantly not. With a fair wind an independent Scotland could sail a clear course to prosperity, but if those winds change and oil prices drop, investment in the North Sea dries up and the moth-balling process begins earlier than expected, then it is neither scare-mongering nor propaganda to suggest that periods of serious economic stagnation will be the result.

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