Scottish Independence Case Clouded by Oil Industry Growth Drag

Scottish First Minister Alex Salmond says North Sea oil and gas is a boon for Scotland’s economy, helping it outperform the rest of Britain and making the case for independence. Official U.K. economic data suggest otherwise.

A 30 percent slump in North Sea oil and gas output over the past two years stymied U.K. economic growth, contributing to the slowest post-recession recovery in more than 80 years, according to the Office for National Statistics.

“It confirms that the decline has been pretty important and has made getting out of the fiscal hole we are in more difficult than it would have been,” John Curtice, a professor of politics at Strathclyde University, said in a telephone interview Aug. 16. “There is no doubt that the prospects for oil are a matter of dispute between the two sides.”

The prospects for North Sea hydrocarbons are at the heart of the debate about whether Scotland would be more prosperous if it separated from the rest of the U.K. Salmond, a former oil economist, says the industry is on the cusp of an upturn that will strengthen Scotland’s economy by boosting revenue.

Salmond’s view that oil levies have the potential to improve Scotland’s prospects isn’t finding favor with voters. The latest opinion polls show support for independence lagging the status quo by more than 20 percentage points. A public vote on whether to quit the U.K. is scheduled for Sept. 18, 2014.

The U.K.’s gross domestic product expanded faster in eight of the last 16 quarters when North Sea production was excluded, the data show. Including oil and gas, output boosted economic performance twice.

Better Judgment

“GDP excluding oil and gas gives a better judgment of how the economy is recovering,” John McLaren, professor of public policy at the Glasgow-based Centre for Public Policy for Regions, said in a telephone interview on Aug. 7. “On that basis the recovery is better than it would appear.”

Over the past decade dipping production has tempered GDP data in 22 of the 40 quarters, while it has outperformed in six quarters, the ONS data show. GDP expanded 0.6 percent in the second quarter with oil and gas production increasing in line with the economy. The ONS and economists measure growth on an inflation-adjusted volume basis.

The Scottish economy lagged growth in the U.K. between 2001 and 2011, McLaren said in a study published in March. Including the effect of falling North Sea production, which has declined since 1999, the Scottish economy shrank 0.3 percent a year over the decade on average while U.K. GDP rose 1.6 percent, he said.

The figures “do not capture the fact that rising oil and gas prices mean that the value of each barrel extracted is now substantially higher than it was ten years ago and the wider positive benefits that this provides,” Scottish Energy Minister Fergus Ewing said in an e-mailed response to questions.

Offshore Investment

Measuring the contribution of oil and gas on a cash basis, the measure used by the Scottish government, Scotland outperformed the U.K., helped by oil prices rising more than five-fold over the period, McLaren’s study said.

Investment in the North Sea will rise to a record 13 billion pounds ($20.3 billion) this year, the industry group U.K. Oil & Gas said in March.

“A period of sustained investment means our forecasts are more likely to be met,” U.K. Oil & Gas spokeswoman Sally Hatch said in a telephone interview. Over the next four years, production may rise 30 percent to 2 million barrels a day, the group said.

Tax Take

The Scottish government and the Office for Budget Responsibility, the U.K. fiscal watchdog, differ in their forecasts for North Sea tax revenue.

The tax take from the North Sea will be about 26.7 billion pounds over the next five years, the OBR, the U.K.’s fiscal watchdog set up in 2010, said in its central forecast. That’s based on flat production and a lower oil price than the Scottish government is assuming.

The semi-autonomous government, based in Edinburgh, predicts revenue of 41.2 billion pounds over the period. In March it forecast an annual average price of $113 a barrel through 2017. This year it has averaged almost $108 a barrel.

The Scottish government’s estimates are “top of the range in terms of optimism,” McLaren said. “It is probably best not to assume too high a production or price estimate.”

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