Economics of Independence Oil and Gas

Aberdeen failed by Westminster’s City Deal let-down

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Aberdeen yesterday received a derisory offer of help from Westminster

ABERDEEN City needs help. The collapse in the oil price has cost the oil industry upwards of 65,000 jobs. The city and Scotland’s north east are feeling the hurt. The region, whose oil and gas industry bailed out the UK throughout the 1970s and 80s when the UK nearly had to go cap in hand to the International Monetary Fund and has since contributed vital billions to the UK Treasury, yesterday received a derisory offer of help from Westminster in what you could argue is the worst City Deal yet announced.

Westminster told Aberdeen that oil price volatility meant they needed the UK’s broad shoulders, but when Aberdeen asked for help Westminster just shrugged. The region made the case for £2.9 billion in support and yesterday David Cameron visited the city to announce that Westminster would offer £125 million. Putting that into perspective the UK Government plans to borrow over £3bn to refurbish the House Of Commons and the Lords, £125m could end up being similar to interest on the Westminster refurbishment borrowing of which nearly 9% will be deducted from Scotland budget. It is also under a third of the deal given to Glasgow when Osborne was claiming the economy was in recovery and growing strongly – so take no heed of Aberdeen’s extraordinary circumstances.

The fact that there is any money at all to support the region has to be welcomed, and more so the Scottish Government’s commitment to take the City Deal figure up to £504m with its own money, meaning the deal is actually 75 per cent funded by the Scottish Government.

Cameron sees himself riding to the rescue of the north-east on a white charger, however, this is anything but – £125m over 10 years, is £5m less than his government charged Google for 10 years’ Corporation Tax.

Aberdeen, a city that voted no to independence largely due to worries over oil price volatility and promises of Westminster support for the sector, must be wondering what it has done to deserve such a slap in the face.

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transport links down the east coast from Inverness to Aberdeen and Dundee to Edinburgh a national embarrassment

There is £6m for transport feasibility studies and hopefully more money will become available from the Scottish Government when those are completed as transport links down the east coast from Inverness to Aberdeen and Dundee to Edinburgh are a national embarrassment. Key infrastructure projects can be brought forward and broadband infrastructure investment is also needed, as well as connectivity to Aberdeen City Airport – here, I have gone and spent all the money (including the Scottish governments) already.

The bigger picture is the unionist narrative that Scotland, had we voted Yes, would be in fiscal difficulties by independence day in March this year. This myth needs to be challenged. It is true that oil revenues are volatile but the reason $30 oil is such a problem, is due to repeated UK governments wasting generations of vast North Sea revenues. Both Labour and Conservative governments at Westminster failed to establish an oil fund, something former Chancellors Denis Healey and Alistair Darling have both conceded was a grave mistake. Short-sightedness and poor fiscal planning meant that billions of pounds of bonus revenue subsidised the rest of the UK’s deficits in the early 1980s leaving nothing in the bank for our rainy todays.

Norway, a small independent oil rich nation, has far less of a problem as in the mid 1990s they started setting money aside to deal with volatility and that fund is now worth a whopping $800bn. They are spending 208 billion kroner ($25.2bn) of their oil wealth this year, topping up the 204 billion kroner it predicts it will receive from offshore oil and gas fields.

The Norwegian government will also cut or hold income taxes for nine out of 10 Norwegian people – not very austere. As Larry Elliot, the Guardian’s economics editor, once wrote: “An entire era [of UK North Sea oil] can be summed up in three words: discovered, extracted, squandered.”

Scotland wouldn’t be independent yet and negotiations on debt share would involve recognition of Scotland’s past contribution to paying down the UK debt and the predicted future value of assets being transferred. Ironically, the UK negotiators would right now be trying to make the case that the oil price would soon rise and so we should be taking more of the debt. But as Alex Salmond said at the 2014 Business for Scotland conference, “no deal on currency, no deal on debt”.

If I were at the negotiating table I would have said if we take a population share of debt then we want written guarantees of debt relief linked to future oil price falls as the UK had already banked the money that should have been set aside for volatility. So would the oil price mean cuts in service or tax rises for a newly independent Scotland? Well extra borrowing for a few years to invest in boosting our economy might well have been the worst-case scenario, and being a region of the UK as it slides into another recession will be no better Would those claiming the oil price means we can’t afford independence today start clamouring for independence if the oil prices rose again? Why, when they parroted the word ‘volatile’ over and over in 2014, do so many Unionists now believe that volatility has ended and prices will remain low forever? A Pinsent Masons report last week found that 96 per cent of oil executives believe that Scotland’s oil industry will recover to ‘peak’ price levels of profitability seen in the first half of 2014 ($110-$115), the majority expecting this to happen within the term of the next Scottish parliament.

Add to that the remarkable resilience of the Scottish economy, we were told that $70 a barrel would decimate the Scottish economy (be cataclysmic even), but even way below $70 our economy’s resilience has been outstanding. In the first three quarters of 2015 Scotland’s economy outgrew the rest of the UK and should hit 2.1 per cent growth for the year. Scottish oil and gas production has risen for the first time in 15 years, up eight per cent, and more than £1bn will be invested in new oil fields counteracting the job losses in more mature/marginal fields. The year 2014/15 was also a record year for inward investment and tourism increased 13 per cent. Recently Scotland’s employment rates have hit record levels (despite 65,000 oil job losses), overtaking England’s employment rates, and wages have been rising faster here than the rest of the UK.

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A 40-year track record of economic incompetence with oil means Westminster must be removed from the equation

The volatility of Scotland’s oil industry and its tax revenues are not an argument against independence. They are an argument for independence – and a 40-year track record of economic incompetence means Westminster must be removed from the equation.

Eventually the oil will run out but with an abundance of renewable energy resources Scotland has got lucky a second time. We can’t afford to let Westminster ruin our renewable future in the way it frittered away our oil and gas past.

Westminster cuts to renewables grants in favour of funding English nuclear plants is predicted to lower our GDP by more than £3bn, and will deny us the opportunity to capture the energy and engineering knowledge of Aberdeen and turn the north-east into a renewables global centre of excellence for when oil does run out.

 

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About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland he ran a small social media and sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and The Huffington Post.

8 Comments

    • Depending in the severity of dyslexia what it stops you from doing can often be less than what it enables you to do. For example although I was always unable to spell and write to a level that was acceptable to my school teachers my verbal communication was boosted in order to make up for it. It can change your personality and helps deal with set-backs and cam make you stronger and more determined. Many dyslexics are more creative which is why you will find actors and artists and even leading scientists are dyslexic. People can decide they “suffer” from dyslexia and that means they focus on what it stops yo doing if they decide that they are “blessed” with dyslexia then they look for what it gives them. I have had to learn to think logically but have always been able to think creatively and problem solve in ways that are both practical and creative when others don’t seem to be able to. Spell checker technology was a major turning point for me and now having left School hardly able to write I now write a weekly newspaper column. everyone is equal, everyones talents add up to 100% its just that most people are unaware of what their talents are and my dyslexia has forced me to consider and then focus on how my 100% is made up – people who do that maximise their talents.

      I am interested to know why you asked?

  • I agree that North Sea Oil has been largely squandered. BUT to simply go on about this point is pretty pathetic. If Scotland had become independent, we would now be facing austerity on a grand scale.

    • Did you not read the article that point was dealt with – It isn’t credible for Westminster to say we took all the money from the north sea and didn’t set up an oil fund as we can afford to take future volatility in our stride and then to A) offer only £150m and b) in a an independence negotiation not take into account that it owes Scotland some guarantee against future volatility having failed to set up an oil fund. No deal on currency no deal on debt and so borrowing would be more manageable.

      If the oil price comes back to peak profitability as the oil industry survey expects, will you say we can now afford independence or are you against it in principle? Independence isn’t about oil its about Westminster distance disinterest and incompetence.

    • We are experiencing austerity on a grand scale already.

      What you don’t get is that independence = we make decisions relevant to Scotland, not SE England.

      SNP twice in May.

    • So utter incompetence by Westminster over the past 40 years means that this should just be forgotten and Westminster allowed to continue to largely direct how the Scottish economy is run, just because the oil price is currently low? Nonsense. And where are the promised broad shoulders of the UK now? Nowhere; just the usual short-sightedness mixed with an outdated political dogma. That’s why we are now facing austerity on a grand scale. Designed in Westminster, forced on the UK. Just more incompetence.

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