The collapsing oil price is the final nail in the coffin of the case for Scottish Independence

Sturgeon will find any renewed push is fatally undermined by the economic reality

June 01, 2020
Photo: Andrew Milligan/PA Archive/PA Images
Photo: Andrew Milligan/PA Archive/PA Images

Earlier this year Nicola Sturgeon, First Minister of Scotland, announced that the campaign for independence was being put on hold. At first glance one might have imagined that the prospect of a hard Brexit, and the election of a full-term Tory government in Westminster would have provided fertile ground for a new independence campaign. The stated reason for the delay was the Covid-19 virus but there is surely an economic explanation as well. The collapse in global oil and gas prices has undermined any suggestion that Scotland’s economy can be sustained by the revenues generated from the development of North Sea energy supplies. The reality is that the offshore industry is in deep trouble and as a result Scotland is likely to become more rather than less dependent on support from the rest of the UK.

The crucial number in all this is the oil price. Six years ago the price of a barrel of Brent crude was over $110. That price fell by half, and at the beginning of this year appeared to have stabilised at around $60. Revenue was down, and new developments were few and far between but the North Sea industry managed to keep going by cutting costs, including employment numbers.

The last few months have changed all that. Because of the global recession caused by Covid-19 demand for energy has fallen dramatically. In May oil demand was down by 21.5m barrels a day against the level seen in May 2019, according to the latest analysis from the International Energy Agency. That represents a fall of more than a fifth. Even assuming some upturn as the lockdowns are lifted, year-on-year demand is expected to show a drop of around 8 per cent. Supply has not yet adjusted. Production exceeds consumption, pushing more and more oil (and gas) into storage. Those stocks will overhang the market for months and possibly years to come. There is still a fierce competition for shares of the market between OPEC, Russia and the United States. Although the oil market is always volatile there is little chance of a rapid return to sustained high prices, not least because OPEC and other producers are desperate for revenue and will increase output as soon as prices start to tick upwards.

For Scotland the problem is compounded by the maturity of the North Sea which has now been producing oil and gas for almost half a century. Substantial resources do remain to be developed, but they are in small accumulations which tend to be expensive, and in a world where oil prices are below $40 a barrel they are simply uneconomic. According to analysis published by Alex Kemp and his colleagues at the University of Aberdeen, a third of the remaining resources could now be left in the ground, and even some existing producing fields could be in jeopardy if prices stay at current levels. Profits and therefore tax revenues will be minimal and because government pays back a share of the decommissioning costs as fields are closed down, the net tax take is likely to be negative.

The fall in revenue will reflect the decline in activity in the industry. Areas which have thrived on the basis of the substantial multiplier effect created by exploration, development and production in areas such as the Scottish north east will inevitably face rising unemployment. The official body, Oil and Gas UK has estimated that up to 30,000 jobs could be at risk.

Some nationalist politicians welcome the decline of the oil industry, and look forward to Scotland building a new export industry based on electricity supplies from offshore-based wind farms. Scotland does indeed have one of the greenest economies in Europe, but to expect this to translate into export revenue owes more to wishful thinking than economic realism.

Why, post-independence, should the rest of the UK pay the added costs of transporting power from Scotland when wind farms could be built in different parts of the UK, including the north east of England, an area to which the current UK government owes its parliamentary majority? Why should the new clusters designed to establish the next low-carbon advances—in hydrogen and in energy storage—be based in an independent Scotland when they can be located in Teeside or Ellesmere Port or at Harwell in Oxfordshire? Why should the European Union—which last week announced a radical post-coronavirus recovery plan costing €750bn, including major investments to support low-carbon production and infrastructure—rely on power supplies from a country which is no longer a member when Italy, Spain and many others badly need the jobs that investment will bring?

In 2015, independence campaigners failed because they couldn’t produce a clear and credible economic narrative. Circumstances have made that challenge even greater now. With North Sea activity diminished and likely to decline, the economic dependence of Scotland on the rest of the UK is set to increase. Sturgeon may have temporarily taken the issue off the agenda but the SNP commitment to independence is as strong as ever. The demand for a second referendum will return but in the harsh environment of the post-Covid-19 world, it is tough to see how Scotland can be economically independent.