Radical Independence Campaign

The one thing we know with certainty about the future price of oil is that we don’t know what it will be. That’s why the recent assertion from the Scottish National Party (SNP) that independence will coincide with a North Sea Oil “boom” which will enable Scotland to be significantly better off should be taken with a large pinch of salt. It’s based on some speculative forecasting which is at odds with the median forecasts of oil analysts who cover the industry.

Rather than attempting to predict the unpredictable, the more important variable when it comes to oil is who owns it. Under private ownership, even if the “boom” did come to pass it would not provide sufficient funds to service the large amount of debt Scotland would inherit as part of any independence settlement never mind the wealth necessary to rebuild Scotland’s economy.

Over the last ten years North Sea Oil has traded between a low 27 US dollars($) a barrel and high $140  a barrel.  It started 2003 at $27 and rose over the next five years to $140 in mid-2008 at the pre-financial crisis peak of the world economy. It then fell to $40 as the world economy crashed on the financial crisis before taking two and half years to gradually recover to trade around $110 where it has traded for the last two years. The price also determines how much the oil companies extract in any year making revenues even more volatile.

The oil price has been driven by many factors over the last ten years: geo-political tensions in the Middle East; the Chinese economy; and the cycles of recession and recovery in the world economy.  The oil boom at the turn of the millennium was driven by factors that came together at the same time and that is highly unlikely to be repeated.

The worst recession since the 1930s and the weakest economic recovery, particularly in Europe, since the 19th century points to less demand for oil and lower future oil prices than we saw in the heady days of 2008.

The median forecast of oil analysts surveyed by Bloomberg is an almost flat line $110 barrel for North Sea oil for the next four years which is in line with US government statistical department forecasts. These figures are some 15% to 25% lower than the forecasts used by the SNP from the Department of Energy and Climate Change ($130) and the OECD ($150), neither of whom are noted as oil specialists or having a good track record on forecasting the future oil price. It would be prudent in any case, if the key factor in running your finances was North Sea Oil revenues, to conservatively estimate future oil revenues given the high volatility of the oil price.  In a proposal¹ I have put forward I am advocating using a price of $80 with any surplus being put in a reserve fund of which 20% is withdrawn every three years to finance projects in Scotland. This way a buffer is built up in case the oil price falls below $80 and extra funds are needed to plug a gap in the public finances.

Deficit with and without North Sea Oil revenues²

But these revenues even at the SNP’s inflated figures would not be enough to deal with the public spending deficit which on average over the last three years has been £11 billion². Neither could it restore the near £10 billion in cuts in real terms that the coalition will have made to reserved and unreserved public services by 2013/2014 ¹ or service the £106 billion (our per capita share of the UK’s total debt) of national debt we will inherit as part of the independence settlement.

We can say that with North Sea Oil revenues Scotland’s deficit is likely to be smaller but we will not have any more money to spend. We will just have less money to borrow, now by ourselves, than is currently borrowed  by the UK government which in itself presents problems that I have outlined previuously¹. Any “boom” is an investment boom because at sustained price levels of $100 a barrel it makes it profitable for the oil companies to explore and extract beyond the estimated 25 billion barrels of North Sea oil that were previously thought economical. But under private ownership only 30% of these revenues would go to Scotland. The boom in real oil revenues happened in the early 1980s.

The only way to deal with the deficit and restore public services after coalition cuts as well as having money to invest to rebuild Scotland’s economy is by nationalising North Sea oil. This is the only radical way out for the Scottish people. This would see a more than tripling of oil revenues. It would take away Scotland’ exposure to the volatility of the oil price if a reserve fund was structured as I described. It would also allow us to have our own currency and central bank and fund a green sustainable Scotland where peoples’ needs are met. It would allow Scotland to be independent of the Bank of England and the Treasury. We could take the Norwegian route who own a large majority stake in their oil industry and join the European Free Trade Association (EFTA) rather than be caught up in the EU membership game. This would allow us to trade with Europe and be European while not being part of a neo-liberal economic block.

Yes ‘its Scotland’s oil’, but only if it is nationalised. Then we can build a prosperous, equitable and sustainable independent Scotland.

¹http://socialistresistance.org/4649/scottish-independence-itll-be-the-economy-that-decides

²http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/GERS/GERS2013xls

This article was written by Ralph Blake. Ralph Blake is the pen name of an analyst in the Scottish financial industry and former head of research and strategy in investment banking. You can follow him at @theleftbanker