Oil price fall is wake up call for SNP
The fall in the oil price is sending shivers through the markets, but not much has been heard from the Scottish Government which only a few weeks ago was building its case for independence around the revenues it would expect from the North Sea.
The FTSE 100 has fall 10% since June, following a similar fall in the oil price to around $88 a barrel. The Kuwait oil minister Ali al-Omair says it could fall to $76. At that price it would equate to the cost of production in Russia and the US who would have to start mothballing wells or continue producing at a loss.
Exploration in the North Sea is already in decline and costs are rising. The SNP’s forecast that 24 billion barrels remain (against Sir Ian Wood’s estimate of 15-16 billion) is based on extracting almost every last drop and some of that is in marginal fields that the industry will struggle to access, let alone make money out of.
In the White Paper on independence published last year, the Scottish Government said it would build Scotland’s public finances and borrowing requirement on the basis of a cautious forecast for oil and gas revenue, transferring any surplus to a “stabilisation fund”, and withdrawing resources should out-turn oil and gas receipts come in below forecasts.
But a sustained fall which may leave oil prices hovering around the cost of production – which is closer to $100 – would severely undermine hopes of creating a Norwegian-style sovereign wealth fund.
More worrying was the statement from the pro-independence group Business for Scotland which only last month was quoted in the International Business Times saying that “most oil price forecasts are upward”, adding that the one exception was the UK’s Office of Budget Responsibilty “which has a political motivation to underestimate oil revenue”.
The OBR has proved to be in tune with other estimates and forecasts, though there is a body of opinion that suggests the gloom is overdone and that further oil discoveries, notably those off the west coast of Scotland, are yet to be properly factored in.
The fall in the oil price has been sudden but its volatility is nothing new. But those trying to build a future around it need no reminding that it is finite – the North Sea will be dry by 2050 – and that the price is vulnerable to sharp swings. In 1999, when Scotland voted for devolution, a barrel of oil was priced at just $10. A decade later it had surged to $147 amid talk of it hitting $200. As recently as May this year Finance secretary John Swinney was forced to revise his revenue estimates downwards.
Scotland’s problem is that unlike other oil-rich countries it has no huge well of cash reserves to fall back on and is in no position to dictate prices or world supply. The Saudi Arabians, who want to maintain levels of output, in fact cut production by 400,000 barrels a day in August. That is almost half the North Sea’s average of 866,000.