We'll all pay a high price for 'Scotland's oil'

We'll all pay a high price for 'Scotland's oil'

by Murdo Fraser
article from Saturday 16, March, 2013

WHEN I WAS at school in Inverness back in the 70s, it was de rigeur to wear a little badge on your school uniform with the slogan “It’s Scotland’s Oil!” Who knows, I may even have worn one myself at one point. Certainly this was the most effective political slogan in the SNP’s history, and part of a push at the time that saw a surge in support for Scottish Nationalism, particularly amongst the young and impressionable.

Over the last few days we have had proof positive that history will always repeat itself. Once again the SNP has been trumpeting the strength of the Scottish oil and gas sector as the foundation for the finances of an independent Scotland.

Last week was a difficult one both for the SNP and for the Yes Campaign for Scottish independence. A leaked cabinet paper from the Scottish Government disclosed serious internal concerns about the volatility of North Sea oil revenues as a major proportion of Government incomes in an independent Scotland. It also quoted the Office of Budget Responsibility (OBR) predictions for a fall in UK oil and gas revenues from £11.3 billion in 2011/12 to £4.4 billion in 2017/18. According to the SNP’s own internal document, this would mean that an independent Scotland would be in a much worse fiscal position at that time than the UK as a whole.

Facing several days of adverse publicity, and a serious knock to the credibility of the economic case for independence, the SNP rushed out on Monday its “Oil and Gas Analytical Bulletin”. This contradicted the previous report, and presented a much more optimistic set of figures for North Sea oil revenues in coming years. The higher figures were based on an assumption of both greater output, and anticipated higher prices, than were predicted by the OBR.

The SNP has worked very hard to try and sell the message that its new predictions have greater authority than those produced a year ago. The difficulty for it, and for the Yes Campaign, is that this simply points to the difficulty of predicting exactly what the financial position of an independent Scotland would be. All the Better Together campaign has to do is continue to sow uncertainty about the position, and the contradictory figures coming out from the Scottish Government play into this narrative. (Incidentally, how does building an economic future on exploiting hydrocarbons square with ‘the world’s most ambitious climate change targets’, Mr Salmond? Or should we ask your partner in the Yes Campaign, Patrick Harvie?).

Perhaps the most interesting aspect of this whole debate is the underlying assumption from the SNP that high oil prices are beneficial. Certainly in order to present the income and expenditure account for a hypothetical independent Scotland in a favourable light (or at least no less disfavourable than the UK as a whole at present), then the SNP has to talk up high, and increasing, oil prices in the long term. But this is ignoring a vital factor, which is that whilst high oil prices might help the public finances at a time of high production, they have a negative impact elsewhere in society and on the economy.

We already know we have a substantial problem with fuel poverty in Scotland, with nearly 40% of households officially classed as fuel poor. High oil prices will simply make matters worse. They will also hit hard the average family who run a car, or perhaps even more than one (and in rural areas these are necessities of life). And high oil prices are the last thing that industry needs in the current economic climate.

Undoubtedly one area of the Scottish economy that continues to perform well is the Energy Sector. One only has to visit the North-east of Scotland to see how the oil economy is bucking the trend evident elsewhere. But you don’t have to travel far out of Aberdeenshire to realise that that wealth is not spreading far. And high oil prices are making the economic downturn longer and deeper.

Manufacturing and processing can be very energy intensive, particularly in industries such as chemicals, paper and metals. Most businesses will have transportation costs as a major factor. Higher oil prices will be hitting hard, reducing profitability. As a result, these businesses will be slower to grow, will be employing fewer people than would otherwise be the case, and (inevitably) be contributing less tax revenue. So Petroleum Revenue Tax may be flowing in to Treasury coffers, but it is losing out on national insurance, VAT, income tax and corporation tax.

We only have to look across the Atlantic to see the importance of energy costs in the economy. In the US manufacturing is seeing a resurgence, as companies which have outsourced production to China are increasingly bringing it back to the States. The single largest factor in this trend has been the reduction in energy costs, the wholesale price of which has fallen by 50% over the past five years. This has been driven by the exploitation of shale gas (and increasingly shale oil) from extensive reserves. If the performance of the US economy is starting to get well ahead of that of Europe, then cheap energy has to get the credit.

So the SNP may like the idea of high oil prices in helping it make the case for independence, but in the long run our economy will be healthier, and the public finances stronger, if oil prices are low. And that means that we in Scotland, and across the UK, need to start embracing the shale gas revolution, with every bit as much enthusiasm as we have seen across the Atlantic.

The challenge for the SNP is whether they will put its constitutional ambitions behind the greater interests of the Scottish economy and the Scottish people? On the evidence to date, I won’t hold my breath.

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