Scottish Independence #2: The Oil Debate

by Charlie_East_West on February 24, 2014

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As the Scottish independence debate heats up, David Cameron is currently taking the provocative step of holding a Cabinet meeting in the Scottish oil capital Aberdeen. He will highlight how the UK has the “broad shoulders” needed to support the oil industry, suggesting that Scotland on its own would not have the necessary ways and means to independently cater for the oil industry.

David Cameron has also offered a carrot to the Scottish people over oil, rather than George Osborne’s currency stick. The Westminster government will fast-track the main recommendations of an expert review of the North Sea industry by retired oil tycoon Sir Ian Wood. It is claimed that it could lead to an extra four billion more barrels of oil being recovered, and be worth up to £200billion over 20 years.

Alex Salmond has poured scorn on David Cameron’s oil proposition. Salmond has highlighted that recent Westminster governments have completely squandered the oil revenues. He also highlights that a smaller country than Scotland – Norway – shows a compelling example on how an independent Scotland could effectively utilise oil revenues for long term economic security. He is correct on both points.

Since the 1970s, North Sea oil presented a huge opportunity for the British economy. What has Britain got to show for this? Bugger all. A wasted opportunity. No sovereign wealth oil fund was set up. The idea of a sovereign wealth fund is to put some of the wealth being generated into a nest egg, to invest it wisely for future generations or times of economic crisis. It is the practise of prudence, common sense and good economic housekeeping.

Norway has effectively used its North Sea revenues to amass a sovereign wealth fund of $780 billion which will largely be used to protect the nation’s ageing population and the required pension securities. Typically, Britain did not share this vision. Instead, Britain used its oil and gas revenues to pay for mass unemployment, tax cuts and government spending. A reasonable percentage of the billions misspent by the Treasury might have been used as the capital for a national investment bank, welfare programme or pension pot – but neither Conservative nor Labour governments had the long term vision or long term motives to use the oil receipts for these purposes. In effect, Scotland’s oil revenues paid for Westminster’s de-industrialisation of the UK, free market deregulation and the ever creeping dependency on volatile financial markets centred in London. Because successive UK governments frittered away Scottish located oil based revenues, and had not built up contingency oil revenue sovereign funds to deal with the 2008-2014 economic crisis, it could be argued that Scotland is only operating a deficit because it is part of the UK. It had no independent stake in any oil fund safety net for a rainy day. An entire oil era was squandered.

And this all comes back to why Cameron has picked the wrong battle over oil and why Alex Salmond has a point. Almost every nation that has discovered oil or some other great mineral resource has started a sovereign wealth fund and they have all become wealthier and more economically secure as a result – except Scotland.

Let’s consider that an independent Scotland does accept its population or GDP per capita share of debts run up by the UK. Where does this leave Scotland, in terms of economic stability and the relationship between this and oil revenues?

- It is claimed that Scotland has a potential law of diminishing returns within the North Sea oil supply, and Scotland’s economic stability as a result of oil. Yet, the situation is hardly a bleak one. Under the general rules of the “median line principle” of the Geneva Agreement (the standard rule for deciding geographical share of oil rights) an independent Scotland will own around 90% of the North Sea oil and have the locational rights to potential new extraction sites further north (as shown in the picture above). Scotland will continue to produce oil and gas into the second half of this century. As the UK Government’s own Oil and Gas Industrial Strategy (published in March 2013) confirms – “According to Oil & Gas UK’s Activity Survey, the reality is that the UK will continue to supply oil and gas well beyond 2055.”

- The overall share of tax receipts in Scotland coming from oil and gas revenues is generally around 10% to 15%, while the figure for Norway is around 25% to 30%. This shows that Scotland is not too reliant on oil and gas as many within the No campaign suggest.

- There are an estimated 24 billion barrels of oil still to be extracted from the North Sea with a wholesale value of up to £1.5 trillion. That’s more than ten times Scotland’s likely share of any passed over national debt upon independence.

- Scotland’s fiscal position is better than the rUK’s last year by £4.4bn (coincidentally equivalent to 60% of the Scotland nominal deficit) and so Scotland can return to surplus far more quickly than the UK by merit of simply having a far higher GDP per head.

- The debt that Scotland will inherit from the UK could be structured at approximately 3.0% interest and last year the Norwegian oil fund returned a huge 14% profit. Do the maths. Scotland can pay any long term structured debt back at 3.0% and invest for the future at up to 14%.

This estimated scenario trade off between oil funds and national debt is like having a no brainer option between putting all your money into a mortgage or investing in pensions and savings. The answer is obvious. And that’s exactly the No Campaign and previous Westminster government’s business plan – put all your money into their mortgage and forgetting to put anything into a pension or savings.

{ 4 comments… read them below or add one }

Jackie_South February 24, 2014 at 11:31 am

As you know Charlie, I think there are some strong arguments against independence.

But this certainly isn’t one of them. What was Cameron thinking? There are plenty of nations that are smaller than Scotland that have done very well out of their oil reserves.

I can only assume that Cameron has fallen victim of his own Tory prejudices. He simply cannot contemplate that the Scottish are perfectly able to turn a decent return out of their petroleum reserves without some chinless public school product from the Home Counties calling the shots. This is just Born To Rule arrogance without any substance whatsoever.

He has come out with the worst argument for a No vote I have heard.

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Charlie_East_West February 24, 2014 at 11:33 am

Jackie – of all the issues to pick, Cameron has picked the worst one. The argument is stacked up against him. Westminster governments squandered the financial legacy of North Sea oil.

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George_East February 24, 2014 at 12:32 pm

Scotland population: 5.2 million
Norway population: 5.1 million
Qatar population: 1.8 million

Reply

Charlie_East_West February 24, 2014 at 2:24 pm

Scotland’s real long term assets lie elsewhere though….with the wind, the wave and the tide.

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