Oil - An epic example of Westminster's economic mismanagement

Now, let's look at a specific, epic case study of Westminster's economic mismanagement. Norway and the UK have managed their oil and gas industries very differently, resulting in a substantial contrast of fortunes in their economies. A key argument against independence is the claim that Scotland would be too small a nation to maximise the benefit of its oil and gas industry. However, when comparing the UK and Norway's oil and gas production and the revenues generated from this industry, we can see that Norway has generated £572.7bn more than the UK Government in tax revenues since the production of oil and gas began. 472

If Norway had produced significantly more oil and gas than the UK, this may be understandable. However, this is not the case. Instead, Norway has only produced 2.4% more oil and gas than the UK.

A comparative loss of £572.2bn in tax revenue amounts to a significant failure in resource governance by the UK Government. With comparative geologies, original production costs, oil grades, prices and resources, Norway - a country very similar to Scotland in population and geography - has collected a huge revenue windfall, whilst Scotland has not.

We have already explained the cumulative deficit, or the share of the UK's national debt, that has been loaded on to Scotland's account. However, it is worth noting that even with debt loading and the Croydon Principle, Scotland's indicative deficit in GERS was lower than the UK's for 33 of the 42 years for which we have figures. Now, with the price of oil and gas rising, it is expected that the GERS deficit will be lower than the rest of the UK again, as a percentage of GDP. So what changed?

The price of oil crashed in 2015. Brent crude average $52/b in 2015 after having averaged $98/b in 2014. 473 If the claims that Scotland was dependent on oil and gas were true, then Scotland's economy would have crashed with it. However, Scotland's economy did not even enter into recession. According to the GDP figures in the 2015/16 GERS report, the economic growth for the year was negative at 0.04% but the onshore economy grew 1.6%, as the benefit of lower oil prices boosted the onshore economy. Hardly the armageddon predicted during the 2014 referendum if oil prices dropped, never mind crashing the way they did.

Contrast that with the collapse of the financial markets in 2007. The UK economy was twice as dependent on the financial sector as Scotland was on oil. The financial crash led to six consecutive quarters of negative growth - in other words, a recession, from March 2008 to July 2009. 474

We now know that the UK Government's natural resource management track record is dire. Even so, the GERS reports showed a smaller deficit for Scotland than for the UK until the oil crash and the economy stayed pretty much the same from 2014/15 to 2015/16. 475 So why did oil and gas revenues drop to a deficit of £290m in 2016/17, before recovering to £1.25bn in 2018/19 when the oil price rose again? 476

The answer is that the UK Government stopped collecting tax from the extraction arms of the big oil companies. In response to falling oil prices, the UK Government decided to cut Petroleum Revenues Tax (PRT) in 2015 from 50% to 35% and in 2016 it was further reduced to 0%. 477 The supplementary charge was also cut from 6% to 50% to 10% during the same time. 478 This meant that the UK earned less in tax revenue from its oil and gas production.

Despite oil prices rising again and stabilising at between $60.00 and $70.00 and increased production and cost-cutting helping to lower some UK production costs to around $15.00 per barrel, 479 the zero PRT rate means that revenues did not increase in line with oil company profits. This also means that the illustrative Scottish deficit figure did not reduce as tax revenues were definitely cut by the UK Government.

The cuts to the PRT introduced in 2016 have never been reinstated. 480 As a result all oil revenues appearing in GERS since then have been lower than they should have been had those deliberate and unnecessary tax cuts not been implemented.

Add to this the generous tax breaks offered to oil and gas extraction companies operating in the UK and you can see the deliberate hollowing out of Scotland's accounts. This is against a background of the oil and gas industry delivering £2.3bn a day in pure profit for the last 50 years and this is revenue the UK Government will never recuperate. 481

Shell, for example, received tax rebates from the UK Government of £121m in 2021. Those show up in Scotland's GERS as a reduction on the North Sea operations of £121m. At the same time, Shell paid Norway $4.5bn in tax, roughly £3.9bn more than the UK, from just one oil and gas company. 482

That's good for Shell, a company that remained profitable during the oil price drop during the lockdown period of 2020, which then went on to achieve record breaking profits of $17.6bn (double what they made during the entirety of 2021) in just the first half of 2022, as the oil price skyrocketed. It was the oil workers of Aberdeen and the North Sea services companies (more often Scottish-owned) that took the hit when the price crashed. The UK Government protected the big oil companies and their shareholders but left oil sector workers, their families and communities out to dry.

In the first quarter of 2022, major companies operating in the North Sea accrued profits of more than £50bn. 483 This includes more than $15bn made by BP in the first half of 2022, more than double their profits for the same period in 2021. Of the rest of the "Big Five", Shell made $17.6bn, ExxonMobil and Chevron both made $11.6bn and France's Total made $9.8bn. The North Sea giants Shell and BP are now more profitable than before the pandemic struct and have received billions in tax cuts between them.

The UK Government has flip-flopped on the introduction of a windfall tax on oil and gas companies and energy companies which are making massive profits, purely due to unnatural market movements. This is economic insanity, as the UK faces austerity and recession and the CEO of Shell, Ben van Beurden seems to agree. In October he told the Energy Intelligence Forum in London: "One way or another there needs to be government intervention that somehow results in protecting the poorest. That probably may then mean that governments need to tax the people in the room to pay for it." 484 To be clear, he meant oil companies, not oil company executives.

It is now time to start phasing the taxes again and investing the profits in renewable energy projects. This, of course, would return Scotland's finances to the default setting of better than the UK's. So, the UK Government's decision to significantly reduce tax on oil companies has had a major impact on Scotland's national accounts, leading them to show a larger fiscal deficit than the rest of the UK. £2.6bn has been lost from PRT alone since 2015. 485 This support to large oil companies (whether necessary, advisable or otherwise) was managed through tax rebates, which have effectively wiped out Scotland's North Sea revenues. Around 60% of the cost of the PRT cut is deducted from Scotland's accounts in GERS, which cost Scotland around £307m in 2021/22. 486

And finally, what will Scotland's oil and gas revenues be in the 2022/23 set of GERS due to be published in August, 2023? A report by Wood Mackenzie has suggested that government revenues from oil and gas could increase to £12bn in 2022/23. This is before the additional of any windfall taxes, which the UK is currently imposing, which are predicted to add an additional increase in revenues of around £9bn. 487

With regards to GERS and if these forecasts prove accurate, this would see Scotland's revenue from oil and gas increase to £21bn. This increased revenue would leave Scotland's net fiscal balance at -£2.7bn and the lowest net fiscal deficit of any nation in the UK. 488