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UK Economy
Oil rout undermines Scots’ Yes finances
From the Financial Times of Sun, 21 Dec 2014 22:47:15 GMT
Scotland, UK --- Flaring a well signals huge success for Amerada Hess in this discovery well that produced at the rate of 10,000 barrels of oil per day. It was the biggest find in the Scottish sector of the North Sea in over a decade. On exploration wells there is no way to contain out-flowing gas and oil without risking an explosion, so hydrocarbons are shot out into the atmosphere and ignited. A test burn like this will last several hours to be sure the rate of flow is sustainable before a company will invest millions to lay an underwater pipeline and bring in a production platform. --- Image by © George Steinmetz/Corbis©George Steinmetz/Corbis

Scotland’s North Sea revenues would have slumped to one fifth of Holyrood’s preferred forecasts in its first year of independence if Scots had voted Yes in September, according to an Office for Budget Responsibility simulation using current oil prices.

The OBR projections, which take into account a dramatically lower oil price than the one used in Scottish government forecasts, highlight how the nation could have been saved from a crisis in its public finances by voting No in the referendum.

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.

The oil price collapse is partly blamed on higher shale oil supply from the US and Opec output that has exceeded estimates. Ali al-Naimi, Saudi Arabia’s oil minister, has said the $60-a-barrel mark is “temporary”, while other ministers have said it will be months before prices stabilise.

Professor Alexander Kemp of the University of Aberdeen said an oil price below $70 a barrel in the longer term would damage prospects for future Scottish oil extraction. He forecast the lower price would mean the number of probable new oilfields over the next 35 years would more than halve from 188 to 85. “Clearly, tax revenues will come right down,” he added.

The OBR published the simulation of oil revenues in July on different price forecasts. 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.

Angus Armstrong, of the National Institute of Economic and Social Research, said that in these circumstances, a newly independent country would struggle to issue debt in capital markets. “The volatility absolutely kills you. Having to raise an additional £5bn of debt just because the oil price drops in the past five months would have been very serious.

“It is very hard to see how Scotland could have raised those levels of debts in year one of independence,” he added.

Instead of the burden of lower oil revenues falling largely on Scotland, the continuation of the union ensures that those in England, Wales and Northern Ireland provide insurance, he said.

In the longer term, OBR simulations suggest that for the UK as a whole, a falling oil price should benefit the public finances since the additional growth in spending that it is likely to encourage will generate more tax revenues than those lost from North Sea revenues.

Additional reporting by Anjli Raval

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