Black swans and oil shakes… why the maths for Scotland seceding just got worse

Black swans and oil shakes… why the maths for Scotland seceding just got worse

by Ewen Stewart
article from Thursday 12, March, 2020

THE SNP MAY HAVE its troubles in the courtroom but that is not the party’s only problem.

Frankly the SNP’s sums have just gotten a whole lot worse as the price of oil has almost halved since the start of the year. Whisper it but without the British exchequer the SNP government would have some pretty unpleasant choices to make. Would Sturgeon cut health, or education or perhaps in an independent Scotland the old age pension? It really is that bad.

The tragedy is the debate in Scotland has become so polarised and many people so immune to tales of Brexit’s Project Fear (that was never going to happen) that some have started to become deaf to the plight of the Scottish economy if Scotland were to secede from the UK.

Let us be clear before this oil price collapse Scotland’s fiscal deficit is already seven times the UK figure at 7 per cent GDP, compared with the UK‘s deficit of 1.1 per cent – and that is with spending some 17 per cent per head higher, or £1,661 per person. These numbers trip off the tongue but they have real consequence as they are rather worse than both Greece and Italy, hardly models one would wish to emulate.

It is not wise to build an economic case on the unpredictable. The price of a commodity like oil is indeed unpredictable. The Scottish Government, in its 2014 independence case, certainly did not foresee a collapse for not one of its six scenarios suggested the price might fall, which given the history of oil prices was more than a tad imprudent. As is now well understood, since mid-2014 the price of Brent Crude has plummeted from around $120 a barrel to $34 at the time of writing.

Sure, some of that fall may be coronavirus related –  a Black Swan event if ever there was one – but most of it has played out from a world far removed from the control room of Bute House as Saudi Arabia and Russia fell out due to an inability to agree production quotas. The truth is while this may be a low point, the oil price is in structural decline from inexorable efficiency improvements, a structural shift from carbon and new technology greatly increasing proven reserves and field recovery rates. The oil price will no doubt remain volatile but it is highly unlikely ever again to be the mulch cow promised by the SNP.

“Scotland’s Oil”, which the SNP made so much of when it suited them, is certainly no panacea. Indeed oil may, at its current price, be a liability and not an asset given the substantial costs to the tax payer of cleaning up exhausted wells.

For Scotland this is highly material. Even in ‘the good times’ oil revenues represented less than 2 per cent of all UK tax revenues. Swings in tax revenues from North Sea Oil of between near zero and £12bn in a Scottish context are, however, highly material. A £12bn shortfall in tax receipts to the UK is an irritant, to Scotland, an economy less than one tenth the size of the UK economy it is near catastrophic. Indeed with Scottish public spending of £75bn after separation such a collapse would represent a staggering fall of 16 per cent of the tax base from peak to trough.

To put this large number in context it is almost the entire NHS budget in Scotland*.

Moreover the North Sea fields are fairly mature, in structural decline, and given the difficulty of the geology, associated with high extraction costs. It is estimated that the environmental clean-up cost of redundant fields could be £77bn**  which would be largely met by the tax payer. Such large sums can be far more easily spread over 65 million UK citizens but borne by the much smaller Scottish population of 5.4m would be quite a different thing. Oil at the current price might prove to be a liability for the tax payer and not an asset.

Yesterday the British Chancellor announced in his Budget speech a significant increase in public spending for all of the UK. No Scottish Government could do that when in deficit to the tune of £12.6bn, or £2,300 per head of population – instead, to balance its books it would need to introduce economic austerity on a scale never experienced before by any living Scot.

Oil is in long term decline; volatile and unpredictable it would not be able to rescue Scotland but could cause even greater economic ruin. With the collapse in the oil price the maths just got a whole lot worse and while some may shrug their shoulders and say it will be alright on the night, “Brexit has gone just okay, so will Scottish separation” it won’t. Without severe and sudden economic changes to Scottish public spending it can’t.  

A newly independent Scotland would quickly be forced to face some very unpalatable choices indeed. The SNP might not like it but Scotland as part of Britain is well cushioned for the storms ahead.

*   NHS spending in Scotland 2018-19 £13.4bn

** Source: The Oil and Gas Authority (OGA)

Photo of a black swan b  DarkWorkX from Pixabay 

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