Scotland and the UK after the Oil Bubble
Sunday Mail, January 18th 2015
Ever since its discovery, North Sea oil has played an important part in Scottish and British political and economic calculations.
In recent months, the falling oil price has challenged many assumptions. These include the SNP’s version of independence and the lack of long termism in the UK Government, while producing shockwaves to the Scottish economy and wider UK and global consequences.
Most immediately, there is the threat to jobs and livelihoods. The North Sea oil and gas sector directly employs 450,000 people and makes a huge contribution to the Scottish and UK economies. And with decreasing returns thousands of jobs, production, and future investment are now at risk.
This has an impact on Scottish independence. Alex Salmond’s prospectus offered last year was based on Scottish Government figures of $113 a barrel for North Sea Brent. By the time of the referendum it was trading at $97 a barrel, and currently is below $50.
There are questions for the UK Government which has been the main beneficiary of 40 years of North Sea oil and nearly £400 billion in real terms in revenues – a sector David Cameron has called ‘the jewel in the crown of the UK’.
An obvious casualty of the oil price fall is the Salmond version of independence. In the world of Salmondnomics an oil price of $113 a barrel would provide Scotland with a security and ballast to build a different kind of society and make long-term investment in public services.
Little was made of the volatility of the oil price. Or the downside of an economy where 15% of GDP comprised oil – as opposed to 2% of the UK. The former is a world where oil companies could have a lot more sway over government than they currently do.
Yet there is equally a challenge to how the UK Government ‘manages’ the economy. It is the UK, not the Scottish Government, which provides the regulatory and taxation framework for North Sea oil.
It has consistently mismanaged oil with continual tax changes. Labour increased corporation tax on oil firms in 2002 and 2006, and the current government did so again in 2011.
The UK has been consistently short-term using oil in the 1980s to pay for mass unemployment. Worse, in the 1970s Tony Benn as Energy Minister advocated setting up an oil fund only to see the Treasury veto it. Alistair Darling recently conceded this was a mistake stating that ‘if we had our time over again, perhaps we should have [set up a fund]’.
Gavin McCrone, economist and former government adviser has said that the failure of the UK to act long term on oil was ‘a serious mishandling of the greatest opportunity for the economy in the last half century’.
Now it is true that a Scotland heading to independence in 2016 would have to face some tough choices. But there is an element of Schadenfreude on the part of UK authorities. Bank of England Governor Mark Carney stated that the oil price fall ‘will help the UK but hurt Scots’.
This is based on the idea that falling oil prices will benefit, rather than harm, the UK economy due to the additional growth it will generate in consumer spending which will replace lost oil revenues.
That is a little too sanguine. It depends on consumer spending pulling up the UK economy, despite the amount of household debt. And there is the danger of low oil prices producing falling prices and the prospect across the Eurozone and beyond of deflation – which would be a disaster for the UK.
For all the political rhetoric between the Scottish and UK governments there have been similarities in how the two view the economy – up to now. Both are corporate friendly, believe in keeping business taxes and corporation tax low, and have ruled out public ownership of assets such as oil which has served Norway for example so well.
There has in both been an absence, post-crash, of thinking about the economy and energy differently. Thus, the oil price fall offers the chance of being more sustainable environmentally, considering the merits of a carbon tax, and looking at the subsidies which cover energy from wind farms to nuclear power.
The oil price shock is an opportunity and challenge. The most immediate is to address the threat to jobs, skills and investment. But beyond that it offers an opening for the SNP to develop a vision of independence which isn’t predicated on oil and $100 barrel prices, and which acknowledges that the world is filled with risk and uncertainty. There is a downside in this, but the beginnings of a more honest debate about Scotland and the UK’s future.