Oil price drop would have forced an indy Scotland to borrow 6% of national output

So as we go paddling towards some form of resolution to our budget crisis, the FT has some, er, good news for thwarted Scottish Nationalists, on foot of a simulation of oil revenues by the Office for Budget Responsibility…

Had Scotland voted Yes to independence, it would now be looking at oil revenues of £1.25bn instead of £6.9bn in 2016-17 — its first year as a new country — while facing a deficit of close to 6 per cent of national income, compared with a UK forecast of 2.1 per cent.

Paul Johnson, director of the Institute for Fiscal Studies, said the OBR scenario highlighted “the uncertainty and volatility of oil prices . . . and their impact on Scotland, which is far more dependent on oil revenues than the rest of the UK”.

North Sea revenues are already falling to negligible levels, after Brent crude oil prices plunged from $97 a barrel on the day of the independence referendum to $61 last week. Meanwhile, delays to east coast investment projects are forcing the government to consider cutting taxes further in an attempt to stem the slide in new exploration.

Sort of unbolting a door after it’s been (fairly) firmly shut? John Swiney was having none of it in written Parliamentary answers last week:

A range of institutions have published forecasts for oil prices in recent months. The recent dip in prices has been driven by a number of factors, many of which are anticipated to be temporary, and the majority of forecasters expect prices to start rising again next year.

For example, in their 2014 World Oil Outlook report published last month, the Organization of the Petroleum Exporting Countries assumes a nominal oil price of $110 over the period to 2020. This is in line with the price assumption used in Scotland’s Future.

One of the reasons for the drop in oil is indiscipline in the OPEC cartel. Other contributory factors are the growth of oil production outside OPEC, and the decreased dependency of the US on imported oil on foot of the shale oil revolution.

But the Rouble crisis is a reminder, if such were needed, just how volatile dependency on the oil market can make an economy. The FT again…

The most pessimistic scenario assumed crude prices higher than those today with $77 a barrel in 2015-16, but following a path similar to the current oil futures prices with a $75-a-barrel price in 2018-19.

Under this scenario, even taking into account lower investment in the North Sea, the OBR forecast that between 2014-15 and 2018-19, revenues broadly applicable to Scotland — 90 per cent of the total — would reach £8bn.

That figure is less than a quarter of the Scottish government’s preferred forecast of £34bn for the revenues it believed it could expect over the same period based on what it thought was a cautious estimate that oil prices remained at $110 a barrel, encouraging stronger output.

It is half the Holyrood government’s most pessimistic scenario of £15.8bn, which was based on the oil price drifting down to $99 with lower output.

The Scottish government’s rule of thumb is that every £1bn lost to the exchequer in oil revenues accounts for additional public borrowing of 0.6 per cent of Scottish national income. It suggests that with a UK forecast for borrowing in 2016-17 of 2.1 per cent of gross domestic product, a newly independent Scotland would have faced borrowing close to 6 per cent of national income at current oil prices, due to the higher public spending per head that people in Scotland receive.

 

It looks like the SNP have inherited the best of both worlds. Ducking the awkward question of oil, and routing Labour north of the border. Having ducked independence, there are some sobering questions for nationalists to ask of Scotland’s long term constitutional future, to go along with those Gerry Hassan’s.