The truth about UK oil and gas

The Scots Numpty Party (SNP) bases its case for the viability of Scotland’s independence  on the idea that wicked England has been “stealin’ ouir oil” and that  if only they had control of the tax revenues from UK oil and gas Scotland would become a Caledonian El Doraldo.  Sadly for such people a 2009  a  Scotland Office paper  “Scotland and Oil” dealing with the tax income from oil  and gas  fields around the UK painted a rather different picture. It concluded that:

“• If all North Sea oil revenues had been allocated to Scotland there would only have been 9 years out of  the last 27 when Scotland’s finances would have  been in surplus.

• Including all North Sea oil revenues the last year  of surplus was in 1988-89 and since then there has been 18 years of annual deficits with Scotland’s spending being greater than the tax raised in Scotland.

• Even if all oil revenues had been allocated to Scotland the total deficit would have outweighed the total surplus by £20bn since 1980-81. “ (see page 1 – all references below to pages without a url  refer to this url – http://www.scotlandoffice.gov.uk/scotlandoffice/files/Scotland%20and%20Oil%20-%20Background%20paper.pdf)

So there you have it, the official view is that even if all the oil and gas revenues were   allocated to Scotland they still would not pay their way. Of course, a substantial part
of the oil and gas  tax revenue would not go to Scotland because of the fields  in
English waters.  Exactly how much is debatable, but  most of the remaining gas
is in English waters, viz:

“The SNP claims that Scotland would receive 95 per cent of oil revenue, but its calculation is based on the total revenue from oil and gas. Its opponents say that they do not take into account the large number of gas fields in English waters.

“THE EXPERT SAYS: Prof Haszeldine says: “The vast majority of the oil is in Scottish waters. With practically all of the gas in  the UK in the southern North Sea, that is in ‘English’ territory.” He says it is hard to separate the revenue from oil and gas. “(http://thescotsman.scotsman.com/politics/Can-oil-and-gas-fuel.2834598.jp)

There is also the intriguing prospect of  the outer Islands, the Orkneys and Shetlands,  not wanting to leave the UK or seeking independence.  That would take more oil and gas
revenue out of Scottish hands.

The fact that even  the total  oil and gas tax revenues did not bridge the gap between what Scotland received in money from the Treasury and what she contributed to the Treasury is unsurprising. The price of oil is high now but this is an abnormal. In the period 1980-2003, the price was always below $20 a barrel  apart for two years in the mid 1990s when it was a couple of dollars a barrel  higher.   (see page 3 “Scotland and Oil”) . The price did not rise above $50 dollars a barrel until 2007.

There has also been great volatility in the tax take in recent   years:

“In July last year [2008-9] sitting with the price of oil breaking new highs at $147 a barrel and  projected revenues for the current year [2008-09] at £13.2bn, finances were looking  incredibly good. However, sitting today with oil prices at $70 per barrel and projected  revenues for the current year [2009-10]  of £6.9bn the finances would be looking  substantially different and spending plans would have had to have changed.” (see page 10 “Scotland and Oil”).

At present the Scottish Parliament is in a very fortunate situation. It knows, more or less,  what revenue it will have to spend  for the coming financial year because its funding comes from the UK Treasury. Thus it is spared the  responsibility of raising money from its electors . It is in the same position as, for example, the BBC.

If Scotland were independent it would have to raise the money to be spent by central government.  That would bring a very different relationship between the politicians
and the Scottish electorate.   If  a very large slice of  Scottish government revenue was dependent on oil  and gas revenues , massively swings in the tax collected from year to year, as happened in the years 2008/9 and 2009/10 , it  would  make  forward planning very difficult indeed.  To understand just how volatile tax revenue from oil and gas  has been since production began see http://www.hmrc.gov.uk/stats/corporate_tax/table11-11.pdf.
No electorate is going to be cheering if politicians are constantly having to change spending plans.  The worse case scenario  would be that the oil and gas revenues would be so low that  a Scottish government would simply not be able to fund  the ordinary business of government.  That is not so far-fetched because of the great difference between revenue and expenditure when oil and gas revenue is ignored.   For  2007/8 the Scotland Office estimated that  without including any revenue from oil and tax,  Scotland paid £45,191 billion  into the UK exchequer and received £56,285 billion back, a deficit of £11, 094 billion. (http://www.scotlandoffice.gov.uk/scotlandoffice/files/Time%20Series%20Analysis%20of%20Government%20Expenditures%20and%20Revenues%20in%20Scotland.pdf).

Apart from the volatility of the oil and gas price, there is also the rapidly depleting reserves of oil and gas around  the UK.   Production has already fallen from just under  3 million barrels a day in 1999 to  about 1,25 million barrels in 2014. ( see page 5 “Scotland and Oil”).  The amount of oil and gas will continue to fall over the medium term and the quantuity  oil and gas extracted will be strongly influenced by the oil and gas price. The
lower it is, the less exploitation of the smaller marginal fields.  In the medium term Scotland can look forward to diminishing tax returns whatever happens.

There is a further fly in the Caledonian water.  As the price of oil and gas has risen and the
political volatility of  many of the major oil and gas producers has increased, increased interest has been shown in extracting gas and oil from shales. Most of the likely sites in the UK are in England or English waters.  http://www.bgs.ac.uk/research/energy/shalegas.html.
If this source of hydrocarbons proves to be as abundant  as its advocates claim, the demand for oil and gas from the ever more marginal fields around the UK will diminish.

There are many other economic dragons which an independent Scotland would need to slay, including dealing with their over-reliance on taxpayer funded jobs and how they would fund their share of the UK’s public financial obligations at the point of independence, but the volatility and shrinking of the UK’s oil and gas tax receipts  would be arguably their greatest challenge simply because of the heavy dependence the
advocates of independence have placed upon their continuation at a high rate.