Read more: the Iran deal marks the end of the Oil Age
Read more: 2016–the year when politics will trump economics
The deteriorating relationship between Saudi Arabia and Iran may have global implications of huge importance—but what, you might ask, does it have to do with the lurking issue of Scottish independence and this year’s Holyrood elections on 5th May? The answer is oil, which is the basis of the economics of independence.
To understand this better, cast your mind back 16 months to the independence referendum. It was rejected by 55-45 per cent, but the issue clearly hasn’t gone away. Nicola Surgeon, the First Minister told her party conference last October she didn’t envisage another referendum before 2021, but conceded there might be, for example, in the event of a “leave” vote in the UK’s forthcoming EU referendum. When the votes were cast in 2014, the price of a barrel of Brent oil was still over $100. Today it is less than $40. This weekend, Sturgeon launched her party’s Holyrood election campaign, calling for a “renewed” drive towards independence. So how will oil influence political debate in Scotland in 2016?
How significant are the economics of independence? If people really want to govern themselves, politics will trump economic arguments and according to polls by Michael Ashcroft, those voting for independence in 2014 were overwhelmingly motivated by disaffection with Westminster. Then again, you could argue that the economics of that sentiment are never far away. The second most important issue for pro-independence voters was the NHS. The benefits system also figured prominently. For those voting against, the main issues were economic: would an independent Scotland keep the pound and how would the pension system work? Scottish public spending and the context in which it occurs are, therefore, key to citizens’ aspirations and fears. One vital part of that context is North Sea oil revenues, which have fluctuated over the last decade between £4-9.7bn, or roughly between 7-17 per cent of total Scottish fiscal revenues.
In the Scottish government’s last (June 2015) oil and gas bulletin, expected revenues were scaled back substantially. At the time of the referendum, and based on an oil price of $113 per barrel, oil revenues were expected to be almost £8bn in 2016/17, and between $31-57bn in the five years to 2017/18. These estimates were lowered to £500m-£2.8bn, and £2.4bn-£10.8bn, respectively, the latter still based on oil prices rising back to $100.
Read more on the SNP:
The SNP has failed Scotland
Can protest politics keep the SNP in power?
Even these estimates look to have been overtaken by events. The Office for Budget Responsibility and the Institute of Fiscal Studies both reckoned in April last year that North Sea revenues would come in at around £600m-700m a year. The IFS estimated as a result that Scotland would run a budget deficit in 2015-16 of 8.6 per cent of GDP: the equivalent of a financing black hole of £7.6bn, or a rise of roughly 23p on the basic rate of income tax. It predicted this chasm could rise to almost £10bn by 2019/20. The OBR argued last November that North Sea revenues could even be as low as £130m in 2015/16 and £100m a year over the longer term. The negative consequences of low oil prices manifest themselves through lower petroleum revenue tax receipts, higher rebates claimed by North Sea oil companies, and of course lower revenues, profits and jobs in the industry, all of which, in turn, feed back into public tax revenues and outlays.
This new picture of oil and gas revenues flies in the face of assertions made by Alex Salmond, the former First Minister who was himself once an oil economist. Back in 2014 he insisted that the North Sea contained 24bn barrels of oil equivalent (oil and gas) reserves, in spite of expert opinions that this over-estimated recoverable reserves by between 40-65 per cent. He also insisted that whatever the short-term volatility of the oil price, higher prices would prevail and form a cornerstone for Scottish economic prosperity. Similar claims were made early in 2015 by his successor, Nicola Sturgeon, but prices have been sliding almost without interruption. As a result, Scottish public finances look much shakier than politicians portray, and are probably incompatible with the cherished goal of fiscal autonomy.
We cannot rule out, of course, luck, and a revival in Scotland’s economic fortunes if oil prices one day recover to $60-70 a barrel, or maybe even higher. Savage cutbacks in oil exploration and drilling around the world in response to the fall in prices might lead to a “supply shock” some time, and to a recovery in prices. Opec countries, especially Saudi Arabia, might decide to change tack and curtail production if the pain of low oil prices becomes unbearable. And Middle-Eastern geopolitics could pose an overt physical threat to oil supplies in or through the Persian Gulf, especially if Saudi Arabia and Iran were to come into direct conflict.
But luck is a pretty ropey basis for strategy, and a conflict-based surge in oil prices would do no one any good. The more likely outcome is that oil prices will remain weak, and will possibly fall even further. Saudi Arabia, the world’s biggest producer with over $620bn of foreign currency reserves, recently announced that dwindling oil revenues had left it with a budget deficit of 15 per cent of GDP, and no choice but to lower planned public spending in 2016 by 25 per cent, and seek access to international capital markets for the first time since 2007. It shows no willingness to alter its low price strategy to force Russia, the US and other non-Opec producers to lower their production—a low oil price also puts pressure on its arch-regional rival, Iran.
But Iran is expected to raise its own output by about 0.5m barrels per day, as and when sanctions are lifted. Market experts also think that, politics permitting, Iraq and Libya are also poised to raise production. The International Energy Agency paints a gloomy picture for oil producers in the year ahead, citing rising supply, weaker demand, and an inventory of unsold oil of about 3bn barrels, or a month’s supply of world oil consumption. And then there are creeping structural constraints on fossil fuel demand based around climate change agreements, low carbon economy initiatives, and the growth in autonomous or electric vehicles.
The SNP might say that low oil prices are cast in stone. Higher prices could be Micawberish, turning up for a while even though the fundamentals are not propitious. The economics of independence, in other words, could get a shot in the arm from time to time—but it is built on very shaky foundations.
Read more: 2016–the year when politics will trump economics
The deteriorating relationship between Saudi Arabia and Iran may have global implications of huge importance—but what, you might ask, does it have to do with the lurking issue of Scottish independence and this year’s Holyrood elections on 5th May? The answer is oil, which is the basis of the economics of independence.
To understand this better, cast your mind back 16 months to the independence referendum. It was rejected by 55-45 per cent, but the issue clearly hasn’t gone away. Nicola Surgeon, the First Minister told her party conference last October she didn’t envisage another referendum before 2021, but conceded there might be, for example, in the event of a “leave” vote in the UK’s forthcoming EU referendum. When the votes were cast in 2014, the price of a barrel of Brent oil was still over $100. Today it is less than $40. This weekend, Sturgeon launched her party’s Holyrood election campaign, calling for a “renewed” drive towards independence. So how will oil influence political debate in Scotland in 2016?
How significant are the economics of independence? If people really want to govern themselves, politics will trump economic arguments and according to polls by Michael Ashcroft, those voting for independence in 2014 were overwhelmingly motivated by disaffection with Westminster. Then again, you could argue that the economics of that sentiment are never far away. The second most important issue for pro-independence voters was the NHS. The benefits system also figured prominently. For those voting against, the main issues were economic: would an independent Scotland keep the pound and how would the pension system work? Scottish public spending and the context in which it occurs are, therefore, key to citizens’ aspirations and fears. One vital part of that context is North Sea oil revenues, which have fluctuated over the last decade between £4-9.7bn, or roughly between 7-17 per cent of total Scottish fiscal revenues.
In the Scottish government’s last (June 2015) oil and gas bulletin, expected revenues were scaled back substantially. At the time of the referendum, and based on an oil price of $113 per barrel, oil revenues were expected to be almost £8bn in 2016/17, and between $31-57bn in the five years to 2017/18. These estimates were lowered to £500m-£2.8bn, and £2.4bn-£10.8bn, respectively, the latter still based on oil prices rising back to $100.
Read more on the SNP:
The SNP has failed Scotland
Can protest politics keep the SNP in power?
Even these estimates look to have been overtaken by events. The Office for Budget Responsibility and the Institute of Fiscal Studies both reckoned in April last year that North Sea revenues would come in at around £600m-700m a year. The IFS estimated as a result that Scotland would run a budget deficit in 2015-16 of 8.6 per cent of GDP: the equivalent of a financing black hole of £7.6bn, or a rise of roughly 23p on the basic rate of income tax. It predicted this chasm could rise to almost £10bn by 2019/20. The OBR argued last November that North Sea revenues could even be as low as £130m in 2015/16 and £100m a year over the longer term. The negative consequences of low oil prices manifest themselves through lower petroleum revenue tax receipts, higher rebates claimed by North Sea oil companies, and of course lower revenues, profits and jobs in the industry, all of which, in turn, feed back into public tax revenues and outlays.
This new picture of oil and gas revenues flies in the face of assertions made by Alex Salmond, the former First Minister who was himself once an oil economist. Back in 2014 he insisted that the North Sea contained 24bn barrels of oil equivalent (oil and gas) reserves, in spite of expert opinions that this over-estimated recoverable reserves by between 40-65 per cent. He also insisted that whatever the short-term volatility of the oil price, higher prices would prevail and form a cornerstone for Scottish economic prosperity. Similar claims were made early in 2015 by his successor, Nicola Sturgeon, but prices have been sliding almost without interruption. As a result, Scottish public finances look much shakier than politicians portray, and are probably incompatible with the cherished goal of fiscal autonomy.
We cannot rule out, of course, luck, and a revival in Scotland’s economic fortunes if oil prices one day recover to $60-70 a barrel, or maybe even higher. Savage cutbacks in oil exploration and drilling around the world in response to the fall in prices might lead to a “supply shock” some time, and to a recovery in prices. Opec countries, especially Saudi Arabia, might decide to change tack and curtail production if the pain of low oil prices becomes unbearable. And Middle-Eastern geopolitics could pose an overt physical threat to oil supplies in or through the Persian Gulf, especially if Saudi Arabia and Iran were to come into direct conflict.
But luck is a pretty ropey basis for strategy, and a conflict-based surge in oil prices would do no one any good. The more likely outcome is that oil prices will remain weak, and will possibly fall even further. Saudi Arabia, the world’s biggest producer with over $620bn of foreign currency reserves, recently announced that dwindling oil revenues had left it with a budget deficit of 15 per cent of GDP, and no choice but to lower planned public spending in 2016 by 25 per cent, and seek access to international capital markets for the first time since 2007. It shows no willingness to alter its low price strategy to force Russia, the US and other non-Opec producers to lower their production—a low oil price also puts pressure on its arch-regional rival, Iran.
But Iran is expected to raise its own output by about 0.5m barrels per day, as and when sanctions are lifted. Market experts also think that, politics permitting, Iraq and Libya are also poised to raise production. The International Energy Agency paints a gloomy picture for oil producers in the year ahead, citing rising supply, weaker demand, and an inventory of unsold oil of about 3bn barrels, or a month’s supply of world oil consumption. And then there are creeping structural constraints on fossil fuel demand based around climate change agreements, low carbon economy initiatives, and the growth in autonomous or electric vehicles.
The SNP might say that low oil prices are cast in stone. Higher prices could be Micawberish, turning up for a while even though the fundamentals are not propitious. The economics of independence, in other words, could get a shot in the arm from time to time—but it is built on very shaky foundations.
