Comment: Gone are days when oil bailed us out

BRING out the sun shades and the parasols: good news is not just breaking out but beating down from a cloudless sky.

Offshore jobs were bound to fall. Picture: Contributed
Offshore jobs were bound to fall. Picture: Contributed
Offshore jobs were bound to fall. Picture: Contributed

Few say they feel it. But for the record, Scotland’s GDP is up 3 per cent on 12 months ago. And for those who insist labour market data provides a better guide to our economic health and wealth, the news is better still.

Unemployment in Scotland is down another 15,000 in the three months to December and now stands at 149,000, or 5.4 per cent. Numbers employed stand at a record high of 2.6 million. And average earnings are now growing at 2.1 per cent, comfortably higher than the rate of inflation.

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However, there are good reasons why our welcome needs to be cautious – and not just because of a natural scepticism about “good news” from the government with an election round the corner.

The dramatic fall in oil prices, even allowing for the recent recovery back to around $60 a barrel – brings evident downsides for Scotland. Indeed, when offshore oil and gas activity is added to calculations of our onshore economy, the uplift is altogether more muted. In terms of GDP per head there is in fact little gain on the pre-recession levels we were supposed to have sailed past with ease last year. And those improving labour market figures are by no means evenly spread across Scotland. In Glasgow – arguably the neediest area – there are signs of marked underperformance.

The latest UK National Accounts last week did not change the big picture in Scotland of the overall GDP gain. But even before the worst of the oil price fall had occurred, there were worrying signs of a fall in performance which clouds the “good news” sunshine.

When we look at Scotland’s onshore GDP performance, the upturn over the past five years is in no doubt. But add in our geographic share of “ex regio” activity – offshore oil and gas principally – the magnitude of increase is much smaller. The per capita figure in the third quarter of 2014 stood at £7,057, compared with £7,050 in the third quarter of 2008.

Given the subsequent impact of the plunge in the oil price and “total Scotland” GDP per head may struggle to show an improvement at all on the level five years ago.

Many might argue that this is a statistical standstill merely – almost all of us live and work onshore and our livelihoods and prospects depend on onshore economy performance.

You might not find much support for that view within the UK Treasury, or at Holyrood, which would dearly wish that a geographic share of North Sea oil revenues accrued to Scotland.

Government North Sea oil revenues in the third quarter of last year, calculated on a geographic share basis, at £536 million were down 36 per cent on a year earlier and way south of the figure for the first quarter of 2013.

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What might the oil price fall mean in terms of lost jobs? Inverness-based economist Tony Mackay reckons direct employment in the oil and gas industry in Scotland at about 56,500. Total oil-related employment he puts at 133,000 – markedly more modest than the Oil & Gas UK figures.

North Sea oil employment, he points out, would still have fallen by about 12,400 had the price stayed high. Most of the decline is attributable to the completion of development work on new fields. Additionally, there has been a decline in employment in line with the falls in UK oil and gas production.

Now we have to weigh the impact of the cancellation or postponement of possible new developments, the closure or decommissioning of existing fields (such as Brent) and industry efforts to reduce both operating and development costs.

There is also great pressure on the UK government to reduce the taxes on the industry – clearly a priority for the Budget next month.

Assessing all these factors, Mackay calculates a range of employment outcomes. Had the price remained at $110 a barrel, he forecast a fall of 2,800 jobs by the end of this year while on a $40 a barrel forecast, he foresees a loss of 13,400 jobs. By the end of 2017 the forecast range is a fall of 12,400 at $100 a barrel, to a 28,600 fall at $40.

However, futures markets are currently expecting the price to average about $80 over the next few years. Mackay’s forecasting model for an $80 price shows direct employment falling by 18,700 in the period to the end of 2017. The fall in indirect and induced employment may be similar, implying an overall fall of up to 40,000 jobs over the next three years: tough for the Aberdeen area but not as apocalyptic as some had feared.

And is it Aberdeen that has the more worrying employment problem, or Glasgow? Glasgow accounts for some 16.3 per cent of the Scottish GDP so is clearly important to the national economy. But claims that the Commonwealth Games delivered a significant economic boost may have been well wide of the mark.

Mackay’s provisional estimates show that Glasgow’s economic output rose by just 2.4 per cent last year, well below the Scottish average of 2.9 per cent. The Glasgow growth rate was the third lowest in the country and the city ranked 30th of the 32 areas. Recent figures show Glasgow has the third highest unemployment rate of the 32 areas and has experienced the lowest percentage decline – significantly below the fall in Scotland as a whole.

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What of the 1,000 extra jobs the city claims were created in the approach to the Games? A lot of the impact, he suggests, was the displacement of activity that would have occurred in any case – both visitor expenditure and construction work. Both the Glasgow Economic Leadership initiative and a Glasgow Economic Commission seem to have had disappointing impacts to date.

What the wider city conurbation needs is a catalyst similar to the role played by economist Jim O’Neill in galvanising a Manchester and northern cities revival. Chancellor George Osborne needs to follow through on his rhetorical support for this – and Scotland needs to secure similar backing for the feelgood factor to be truly felt.