The unpredictability of future oil prices makes an independent Scotland’s viability all the more uncertain, says Peter Jones
Alex Salmond, many years ago, told me a joke. Can’t remember it exactly, but the gist of the punchline was that God, having granted two totally improbable wishes to someone, said that not even he had the power to grant the third, which was to predict what oil prices would be in the future.
It is, obviously, not a joke that he will be repeating anytime soon. Given the importance of oil revenues to the economics of an independent Scotland, he will be anxious to assure people that the price of crude oil, and hence the tax revenues that flow from the North Sea, will stay high, and maybe go higher still, for some time to come.
But then last week along came the independent non-aligned Office of Budget Responsibility (OBR). It predicted that the UK’s oil revenues, having totalled £11.3 billion in 2011-12, will fall to £7.3bn this year, £6.7bn next year and carry on dwindling to £4.6bn in 2016-17.
If this is borne out in reality, it will make a big difference to the finances of an independent Scotland. When the figures for government revenues and spending in Scotland are published next March, it is safe to say that Scotland’s share of the oil revenues will be just short of £10bn.
While that will not give Scotland a surplus of taxes over spending, it will create a much better fiscal balance than the UK for that year. It will enable the SNP to say that Scots pay more taxes per head than the rest of the UK and proves that Scotland can more than make her way in the modern world.
That may be true for 2011-12, but we need to know about the years ahead. If the oil bonanza is behind us, being an independent country will be hard going. According to the OBR, Scotland’s oil bounty will be about £4bn in the year the SNP have targeted for independence, £6bn less than in 2011-12, and likely to put Scotland’s deficit roughly on a par with the UK. That is not exactly the gilded escape ladder from UK decline some in the SNP say it is.
But how good is the OBR’s forecast? First, there is the likely future price of oil, which is a global issue. Second there are factors affecting the volume of production which are special to the North Sea, a local issue which is not widely understood.
The price of oil, you may think, ought to be a relatively straightforward matter. We know that the supply of oil to be got out of the ground is getting tighter, and demand for oil, especially from the huge developing countries of China and India, is generally rising. Basic economics says that when demand rises faster than supply, the price goes up.
That, however, is a long-term view. In the short-term, the oil price is subject to remarkable roller-coastering. You will recall that in the summer of 2008, it shot up to $147 per barrel, and then tumbled just as dramatically six months later to about $35 per barrel. Even this year, Brent crude has been as high as $125, and as low as $90 per barrel. Upon such swings do billions of pounds of tax revenues depend.
Why is that? The short-term oil price depends on all sorts of things, some foreseeable, some not. The foreseeable include economic recessions which slow growth in demand and can even reverse it. The 2008 peak of $147 occurred before it became obvious that North America and Europe were heading into a recession which, when it did become obvious, caused the dramatic decline.
Then there are unforeseeable events. Will war erupt in the Middle East? Will Israel attack Iran’s nuclear installations? Will Europe’s economy slide into deeper recession caused by some crisis over the Euro currency? Will OPEC shut down the pumps? We may hope that the answers to these and other questions is “no”, but we cannot guarantee it.
This explains the extraordinary spread of oil price predictions that you could find this summer, all carefully constructed by people with immense computing and brain power at their disposal.
At the bottom end were analysts from Credit Suisse who, sharing the bank’s view that the eurozone was about to topple into a deep economic crisis, said that the crude oil price would fall as low as $50 per barrel. At the top end, Vitol, said to be the world’s largest independent energy trader, warned it was “unlikely, but possible” that prices could surge to $150 per barrel. Last December, Goldman Sachs, a big investment bank, predicted prices of $127.50 in 2012 and $135 in 2013.
The OBR’s prediction was that the oil price would gradually fall “from $112 a barrel in 2012 to $92 a barrel by 2017”. This is based on the oil trading market’s future prices, ie that you can buy oil now for delivery in 2017 at $92 a barrel. But go to the UK government’s department of energy and climate change (DECC) forecasts and you find a central predicted price of about $120 a barrel for 2016-17. The DECC forecasts are constructed differently, using supply and demand predictions.
Which is right? Who knows? Frankly, it seems to me that you or I could stick our fingers in the air and pronounce our own forecast with equal authority.
Turning to the North Sea, the OBR also predicted falling volumes of production, which is at odds with the industry’s own estimates of production rising until about 2016-17.
This is because, in recent years, North Sea oil production has been affected by “unplanned shutdowns”. The industry likes to think its installations are so sophisticated that there won’t be any more shutdowns. The OBR, however, aware that much of North Sea infrastructure is some 30 years old, thinks there will be more of them.
In March, Total shut its Elgin platform because of a gas leak. It is still shut, which is a pretty big deal because it also handles production from other fields amounting to between a fifth and a sixth of all North Sea production. And in July, the Office of National Statistics announced that UK corporation tax receipts for March were £1.7bn lower than expected, with about £1bn of that caused by the Elgin shutdown.
Such an incident would blow a rather large hole in an independent Scotland’s balance sheet. And upon such uncertainties, will you and I decide how to vote in 2014.