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Oil folly and the need to seek new fuel treasures

Terry beardForecasting could never be described as an exact science and all predictions tend to include a margin of error. But being 6,000% out is pushing credibility.

That was the accusation made against the SNP today by Scottish Labour leader Kezia Dugdale who probably had to blink a few times before she believed how wrong the Holyrood government had been in its estimate of revenue from the North Sea.

Last year’s white paper on independence had it pencilled it at £7.5 billion. The actual figure will be £130m. Chancellor George Osborne revelled in saying during his Autumn Statement yesterday, an independent Scotland would now be facing “catastrophic cuts”. Well, either that or a huge level of borrowing, along with the interest payments that would have incurred.

Unusually, Nicola Sturgeon cut something of a lonely figure in the Holyrood chamber, attempting to divert criticism of her party’s miscalculation by asking why the Labour party wasn’t challenging the Tories. A normally sure-fire Ms Sturgeon missed the target this time by seeming to forget that it was her turn to answer the questions.

Ms Dugdale took her cue from her frontbench colleague Jackie Baillie who called for the SNP to “apologise to the Scottish people for misleading everybody on oil.” She went on: “These figures expose the stark reality of the consequences of the SNP’s plan for separation.”

The stark truth for the SNP is that the party continued to put oil at the heart of its campaign last year while ignoring warnings that it should not rely on something as volatile as the oil price on which to build its economic plan.

This latest spat is one of several over the mis-match between forecast and actual income. On the day of the referendum Brent crude was $97 a barrel, and within a week it had slipped to $61. Just two months later, the Office for Budget Responsibility said that Scotland would be looking at oil revenues of £1.25bn in 2016-17 — its first year as a new country. Even this has proved over-optimistic as the price of crude has continued to slip and activity has slowed down.

The pro-independence lobby has rather feebly attempted to counter the arguments over the price by pointing to the vast reserves waiting to be explored. This is of little compensation if exploration is uneconomic. Professor Alexander Kemp of the University of Aberdeen said last year that an oil price below $70 a barrel in the longer term would damage prospects for future Scottish oil extraction, and we are currently well below that target.

John Swinney, who delivers the Scottish budget on 16 December, must be feeling the belt tightening a few notches as he tries to wrestle with hope over expectation. He must face the reality of funding a government which is keen on pouring resources into public services it surely knows it cannot afford.

Ms Sturgeon, rather than deflecting criticism to Westminster, would do well to order her economic forecasters to order some new calculators and come up with an alternative model.

So will this trigger a rethink on fracking? nuclear?

Energy policy in the UK has been notoriously chaotic and devolution has made it an even bigger mess.  Westminster is replacing nuclear reactors, Scotland is opposed to nuclear. The UK Energy department and its Holyrood equivalent are at loggerheads over renewables, in particular the subsidies to onshore wind.

Meanwhile, the North Sea is destined to become less of an oil producer and more of a centre for decommissioning of rigs. A new industry that will create jobs but will not provide fuel for the economy.

Sooner of later someone has to face the reality of sustained low oil prices that are likely to remain while the Saudi government in particular refuses to let the price rise because shale gas in the US and Russia is so much cheaper.

It points to Britain being forced to exploit its own shale gas resources, or else put itself at the mercy of imports.

 

 

 

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