There has been much Unionist glee at the recent collapse in the price of North Sea oil.
A barrel of Brent crude is worth little more than half what it was six months ago and economists such as Professor Brian Ashcroft are saying that this has ruined the economics of independence.
Mind you, I don’t recall him being particularly keen on the economics of independence even when the price was high. Up or down, Scottish oil always seems to be a curse.
But they are also saying that cheap oil has undermined the case for green energy. So much for Alex Salmond’s Saudi Arabia of renewable energy. But the crowing may be premature. The collapse of the oil price is first of all an indication that the global economy is slowing, which could undermine the UK’s anaemic recovery and magnify its huge debt pile.
It could also be a portent of further trouble for our delinquent banks. The oil price has been underpinned by all that funny money Western governments have been printing for the past five years. Just as when the housing bubble burst, the oil correction may have financial consequences for banks who lent to the industry thinking oil could only go up; so much for this week’s stress tests on British banks. They always seem to give the banks a clean bill of health just when they are about to go under again.
As for independence, no one in their right minds would ever base an independent Scottish economy on this wildly fluctuating commodity, certainly not the Scottish Government. North Sea oil was as low as $10 a barrel as recently as 1999. It then exploded in price on the back of the credit bubble to nearly $140 a barrel in 2007. That was when everyone started talking about Peak Oil and we were told oil could end up costing $500 dollars a barrel. It then fell by 80 per cent to only $40 within 18 months.
The oil industry is used to these wild fluctuations and isn’t going to close down the North Sea just yet. Much of the investment is secure. What could be killed stone dead is fracking, the capital intensive process of driving oil residues out of rock by injecting a cocktail of chemicals under high pressure. Serious investment in fracking hasn’t started yet, and Deutsche Bank has estimated that it doesn’t make economic sense at less than $80 a barrel.
And far from destroying renewable energy, the price fall may in part be a consequence of green energy’s success. Solar is taking off across the world, from Texas to Saudi Arabia. Germany has staked its future on green energy, and it tends to make things work. In Scotland, wind turbines generated more than 100 per cent of Scottish electricity demand last month.
And while it is still at low levels, producing less than one per cent of US electricity, photovoltaic technology is becoming more efficient as it gets cheaper, rather like the computational power of silicon chips. Renewable energy is a long way from replacing fossil fuels, but the fact that it is now an electricity generating reality is being priced into the global oil calculations. Once the technology is in place, solar and wind energy are limitless in the right environments, unlike fossil fuels where reserves are finite.
But oil has never just been about technology and reserves. The price of oil has always been highly political. What is happening right now is that Opec, the organisation of mainly Middle Eastern petroleum producing countries, has allowed the price of oil to fall in the hope of curbing the growth of fracking and import substitution. Opec normally cuts production when the price falls to halt the slide, but not this time.
America, as it happens, isn’t too concerned about this because it is trying to teach Russia a lesson for Ukraine and the oil price has caused an economic collapse there. The Russian economy is thought to require an oil price of around $105 dollars a barrel to keep on an even keel; or, rather, the pay of the collection of oligarchs who seem to run that country.
The Russian government has had to put up interest rates to (unsuccessfully) halt a run on the rouble. But the 50 per cent collapse of the value of the rouble hits Russian families. And who benefits from that? Vladimir Putin. Authoritarians thrive on apparent foreign aggression and Putin has been increasingly popular since he annexed the Ukraine.
The final factor at work is China. The Chinese bought up a huge amount of oil which they can’t at present use, and that will take a while to work through, especially since the Chinese economy is slowing down like everyone else’s. The spectre stalking the global markets now is deflation, of which the oil price is a symptom. It’s good for most of us that UK inflation is at a record low, but it makes it much more difficult to pay down debt.
And the UK debt pile just keeps on getting bigger and bigger, despite all the claims from the Coalition. Public sector net debt, excluding the banks, rose to £1.45 trillion last month, up by more than £100 billion in the last year alone. If this is a recovery, then I don’t know what a crisis would look like.
The problem is that, while Britain has been creating lots of jobs, they don’t pay well which means low tax returns and high welfare payments to the working poor. What is supposed to happen after a recession is that productivity increases dramatically as firms invest in new technology and pay rises. Austerity Britain is investing in zero-hours cheap labour instead. The tax base is shrinking even as unemployment falls.
Scotland isn’t doing any worse than the rest of the UK but it has the additional problem of out-migration. People leave Scotland because there aren’t decent jobs to keep them here. The consequent relative ageing of the Scottish population is a much more serious problem for Scotland than the oil price. The Institute for Fiscal Studies produced reports saying this on an almost monthly basis during the referendum campaign. Scotland needs growth policies and immigration more than it needs high oil.
Anyway, volatility is simply an argument for an oil fund, like Norway’s, which evens out fluctuations in the price over time and conserves value. Most of the value of North Sea oil went south long ago as Scotland donated its hydrocarbon wealth – around £300bn – to the dubious cause of keeping the British balance of payments afloat while Margaret Thatcher and her successors replaced manufacturing industry with a financial services kleptocracy based in London. Scotland is the only state, region or country in the world to have discovered oil and had no direct benefit. History will condemn successive UK governments for the way they squandered that precious resource.
So I don’t think Unionists will be laughing at Scotland for much longer. The cost of servicing UK debt is already more than £1bn a week and it can only get higher, paradoxically, as the price of oil falls. It’s a curse all right. But not just for Scotland.