Peter Jones: Bright ideas deserve proper respect

Prof Gordon Hughes observations on energy prices offered an opportunity for reasoned debate. Picture: Ian Rutherford

Don’t tear the place apart with the independence debate, former US president Bill Clinton advised us recently. I hope Alex Salmond, his ministers, and advisers took the message to heart, for they are among the worst offenders.

Partisan, and even abusive exchanges, while regrettable, are to be expected amongst political opponents. But swiping at non-aligned people who are contributing their professional expertise to the discussion is just not acceptable. The referendum vote is the most serious decision Scots have been asked to take for 300 years, so surely we have a right to expect some serious discussion, and not insults from a government when its proposal is criticised.

But insults are what we are getting. Recently, Gordon Hughes, a professor of economics at Edinburgh University, gave a talk to the Royal Society of Edinburgh. He pointed out a number of things about North Sea oil which were not mere assertion, but which were backed by evidence.

Energy prices are prone to go up and down in big swings, he said, so it would not be wise to assume that today’s high oil prices will stay high. Innovative technologies such as the advent of fracking in America have caused the US price of oil to slide a bit and the price of gas to tumble.

Geography, he said, also means that Scotland’s energy industries are dependent for their sales on markets in England and Wales. But Scottish independence may mean that a government in London, having lost its income from North Sea oil and gas, might decide to import less energy from Scotland and develop more domestic energy sources such as the unconventional shale gas fields under England or the tidal energy resource around south-west England.

I put this to the Scottish Government which responded with a sneering dismissal. “It is astonishing,” said a Scottish government spokesperson, “that Mr Hughes manages to turn Scotland’s immense energy resources, of which any country would be proud, into a negative for the economy.

“Scotland has an incredible wealth of energy resources from a range of generating technologies, capable of both meeting our energy needs and significant exports. We have astounding green energy potential and vast natural resources with about a quarter of Europe’s wind and tidal energy and 10 per cent of its wave power.

“We have a responsibility to make sure our nation seizes this opportunity to create tens of thousands of new jobs and secure billions of pounds of investment in our economy. Scotland’s relatively strong electricity generation capacity is especially important given that OFGEM are continually highlighting the risk of the lights going out due to a lack of generating capacity south of the Border.

“In addition Scotland’s oil and gas sector leads the world. With more than half of the value of the North Sea’s oil and gas reserves yet to be extracted, up to 24 billion recoverable barrels with a potential wholesale value of £1.5 trillion, oil and gas will remain an enormous economic resource for decades to come.”

Only one of these seven sentences is half an answer to Prof Hughes – the one which contends that England will need to buy electricity from Scotland. It is only half an answer because Prof Hughes’ point was that England might decide to spend its renewables subsidies to benefit its domestic economy – say, by building a tidal barrage across the Seven Estuary which could provide about 8 per cent of English electricity needs – rather than by subsidising foreign Scottish producers.

The remaining six sentences are a rhetorical trick. If someone comes up with a point you can’t answer, the cunning politician converts the point into something slightly different, preferably something that makes the speaker look foolish, or malevolent, or both, and answers that instead. Does the Scottish Government not want a professor of economics performing a public service by contributing to the public debate about independence? Or does it only want to hear from professors who support its political arguments?

Prof Hughes didn’t “turn Scotland’s immense energy resources… into a negative for the economy”. But he did say that independence, because of the big political change that would cause in the relationship between Scotland and the rest of the UK, might well have negative implications for the economy. A reason for that, said Prof Hughes, apart from the market problem already mentioned, is something economists call Dutch disease.

In 1959, Europe’s biggest gas field was discovered underneath the Netherlands. It is still producing. Lots more, smaller, discoveries followed, on and offshore. Bonanza time surely. Pretty soon, however, the Dutch also discovered that traditional industries – shipbuilding, textiles, metal manufacturing – were closing down and unemployment was rising. The Dutch currency – the guilder – was rising in value, as were wage costs in these industries, making them uncompetitive. Astonishingly, the Netherlands’ immense energy resources had turned into a negative.

A similar effect occurred in the 1980s in the UK. The discovery of North Sea oil and the boost it gave to the value of sterling played as much a part in the collapse of traditional industries as did Thatcherism.

These things are now well understood, as are the mechanisms for dealing with them. One is to set up a sovereign wealth fund into which the additional tax revenues from exploitation of a newly discovered resource are parked for use on a future rainy day. Israel has just announced it is going to do exactly that to prevent the shekel appreciating in value when it taps into the recently-discovered Leviathan offshore gas field.

How the Dutch disease problem might play in an independent Scotland is not at all clear because the currency issue is not clear. If the UK agrees to share sterling, it may turn out to be less of a problem. But if the UK does not agree, a new and separate Scottish currency might come under pressure.

The Scottish Government does plan a sovereign wealth fund. But, as Prof Hughes pointed out, the oil revenues would be needed to pay for current services such as schools and hospitals so unless spending cuts are being planned, not only would there be no money for such a fund, but a dip in oil prices would cause a budget problem.

That’s why oil may be a bounty, but it can also be a problem. It’s a serious matter and it deserves a serious answer, not abuse.