An academic’s analysis of the future of the oil industry and its benefits is wide of the mark, contests Peter Jones
FIRST it was unionist scare-mongering and then it was unionist dirty tricks. This is apparently why the Yes campaign did not win the indyref last year, or more precisely, how nationalists are convincing themselves they were unfairly robbed. It is also how nationalists are convincing themselves that another indyref a lot sooner than a lifetime or generation away is justified. Well, excuse me, but how about nationalist dirty tricks?
The problem is that Scotland has more public spending than can be justified by its wealth
One of the biggest is being played with North Sea oil. Long before the indyref proper got going, the SNP convinced people that Scotland was a wealthy country and could rely on £1.5 trillion of further wealth to come from the 24 billion barrels of oil still to come from the North Sea.
Yes, by world standards, Scotland is a wealthy country. The problem is that Scotland has more public spending than can be justified by that wealth. Right now, it is between £6-8 billion too much public spending, and axeing Trident only deals, at best, with about a tenth of that gap.
But if you tell people that there is £1.5 trillion of untapped wealth waiting to be scooped up, that gap seems like an unimportant detail. Now it is blatantly obvious there is not, never has been, and most probably never will be, £1.5 trillion of oil wealth. It was a nationalist dirty trick to pretend that there would be.
Here’s the rub though. Even though this wealth might now be worth nothing, and might even have a negative value in public spending terms (ie would cost tax revenue rather than raise cash) it might still be a huge asset to an independent Scotland. How could this possibly be?
The answer has been provided by Alex Russell, professor of petroleum accounting, Robert Gordon University, Aberdeen. In an online newspaper article, he at least acknowledges, a little grudgingly, that “there is some logic” to the unionist “analysis of the devastating impact the plunging oil prices would have had on the economy of a separate Scotland”.
Nevertheless, he complains that during the indyref “the fact that 98 per cent of the remaining 24 billion barrels of oil in the North Sea lay in the Scottish part of the UK Continental Shelf was dismissed as being more of a liability than an asset in an independent Scotland”.
The figures he cites, however, are not fact at all. Trade body Oil & Gas UK’s latest economic report sets the maximum amount of oil likely to be recovered as 22 billion barrels. Of that, 6 billion barrels have not yet been found. Since nobody knows where they are, the 98 per cent figure is not a fact, but a guess.
But his main complaint is that while he admits the media are right to say “oil at $47 a barrel will raise less revenue than oil at $114 a barrel”, stupid folk like me fail to understand that this means the political negotiations following a Yes vote would have been completely different.
He contends: “The first conversation that Holyrood would have had with George Osborne would have been along the lines of this: ‘Everyone, including Oil & Gas UK, the Department of Energy and Climate Change (DECC) and the so-called independent Office for Budget Responsibility (OBR), tell us the future cash flows from the North Sea are negative with oil at less than $50 a barrel. So, how much will Westminster pay us to take over this liability?’”
(A word of explanation: when the oil stops flowing, the platforms and pipelines have to be taken away, costing roughly £2 billion per year from 2018, for which the government will provide a subsidy of between 50-75 per cent. If the tax raised by production is less than £1 billion, as forecast by the OBR, taxpayers will pay out more than they get in – the negative cash flows mentioned by Prof Russell).
He reckons Scotland would get tens of billions, enough to produce “less of a burden for Holyrood with respect to Scotland’s share of the national debt”. How much less debt, he doesn’t say, not surprisingly, because you can take this imaginary discussion on to a Treasury response: “You say Scotland is wealthy, that the 98 per cent of the 24 billion barrels you are about to take ownership of is worth £1.5 trillion, so we think you can easily afford £40 billion in decommissioning costs.”
After all, as Prof Russell writes: “Oil prices will rise in the future and the North Sea assets would be better protected in an independent Scotland.” I’m sure everyone in the oil industry will heartily agree, and that folk like Goldman Sachs suggesting that oil prices could stay at $50/barrel for 20 years and might even fall now and again to $20/barrel are completely wrong.
He goes on to repeat the nationalist trope that “oil revenue is the icing on the cake of the Scottish economy”. It would be nice if it was just icing that we could do without and still have a perfectly tasty cake, but the fact is that in public spending terms it is not.
Even with oil revenues of £4.8 billion, the Scottish government’s figures for 2013-14 show tax revenues falling short of public spending by £12.4 billion or 8.1 per cent of GDP.
With oil revenues of less than £1 billion, which the Scottish government now admits is possible, the deficit gets much bigger. But fear not, for according to Prof Russell, cutting it back is “manageable short-term economic pain”. Oh really? Finding cuts of at least £8 billion from total spending of £62 billion – that’s “manageable pain” is it?
I look forward to Nicola Sturgeon explaining that. Or rather I don’t. I’d much prefer her to shove this independence stuff to the back of the cupboard where she said it would be for a “lifetime” or a “generation” and respecting the outcome of the referendum as the government of which she is a member said it would when signing the Edinburgh Agreement.
Then we can get on with the important stuff, like turning attention to why health and education seem to be going backwards, problems which her government has all the levers of power it needs to fix.