The Big Lie About Scotland's Oil

There was a time when the pro-independence movement at least made an effort to try and spin economic data to create the illusion that an economic case could be made for Scotland's separation from the UK. Judging by the latest contribution from the Sunday Herald and Business for Scotland, that time has passed. They can't even be bothered to try anymore.

As evidence, here's the front-page splash with which the Sunday Herald assaulted its readers - and insulted their intelligence - this week

I apologise for what follows. There's so much self-evident nonsense in this article that offering a structured debunking feels like writing literary criticism about a bowl of Alphabetti Spaghetti. With that in mind, I advise you take some simple precautions before reading further.

If possible, rest your elbows on the desk in front of you and use your finger tips to hold your head steady. As your brain tries to come to terms with the logical lunacy of what we're about to encounter, it may attempt to put itself out of its own misery by getting you to smash your head into something hard - by adopting the suggested safety position you should be able to resist this. When thwarted in its attempt to get you to knock yourself out, your brain is likely to attempt to save itself by making a bid for freedom - so the use of ear and nose plugs is also advised.

OK, you have been warned - we're going in (the full text  of the article is here).

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It turns out the source for the headline "revelation" is "leading think tank" Business for Scotland (BfS). Regular readers of this blog will know that BfS have an impressive track-record of being a misleading think tank - but in the interest of fairness, we'll put that track-record to one side¹ and judge their latest contribution on its own merits.

The article refers to a report by BfS which used "detailed oil price research since the price crash" and "contrasted the North Sea tax regimes of the Norwegian and UK governments". Having seen the spectacular wrong-headedness of the conclusions, with the same combination of compulsion and guilt that you feel when you slow down to look at the scene of a car-crash, I sought out the report in question.

Unfortunately the article provides no links to the "detailed research", Business for Scotland's Twitter feed refers to their "in-depth analysis" but only links to the same Herald article and a search of the BfS website reveals only this: "Why is Norway still getting much more tax from oil" - a 940 word article by Gordon McIntyre-Kemp¹ which basically made the same nonsense arguments 5 months ago.

For the avoidance of doubt: this is not how leading think-tanks operate, they don't publicise the findings of a report without making the report itself available for scrutiny. Fortunately for us the finding are so blatantly daft that we don't need to see the "in-depth analysis" to explain why the headline conclusions are ridiculous.

So let's unpick what is actually said in the Sunday Herald piece. Now would be a good time to adopt the safety position and put those ear and nose plugs in.

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The first sentence:

WESTMINSTER'S "mismanagement" of oil since the price slump two years ago has cost Scotland tens of billions of pounds and is being falsely used to attack independence

So Westminster's actions "since the price slump two years ago" have "cost Scotland tens of billions of pounds". I feel dizzy just typing this out.

It appears McIntyre-Kemp has given himself (been given?) the challenge of defending the economic case that was used to try and persuade Scots to vote Yes in 2014. He knows that even the most fervent nationalists don't believe a Yes vote would have allowed us to create a time-machine, so arguing "we should have had an oil fund 30 years ago" is pointless².

This means that to defend the economic case presented by the SNP - and championed by Business for Scotland with credibility-destroying disregard for economic sense - he has to defend the oil revenue forecasts used in the independence White Paper.  He has to argue that had we voted Yes we'd have generated this revenue despite the oil price crash.

Let's remind ourselves: insofar as any economic case was presented in the White Paper, it assumed £6.8bn - £7.9bn of annual oil revenues. None of the cheer-leaders for independence should ever be allowed to forget this fact.

So how can anybody argue that the current reality of effectively zero North Sea tax income could instead have been nearer £8bn if we'd voted Yes? Well, the article continues:

Scotland would be an economic powerhouse if UK ministers had not mishandled North Sea wealth since the start of the oil crisis [...] since the crash in oil prices in 2015 when the price of a barrel more than halved, Norway has made nearly £29.33bn in oil and gas revenues, while the UK lost almost £22.8m

The mind-numbingly simplistic argument here appears to be "Norway produced loads of tax revenues, so we should have been able to as well". To try and discern how the author thinks this could have been achieved, we need to give the Alphabetti Spaghetti a bit of a stir;

the UK government's mismanagement of oil and gas taxation removes billions in revenues from Scotland’s national accounts [...] Oil giant Shell was made to pay taxes in each of the 24 countries where it extracts oil and gas - apart from the UK [...] the UK also gave Shell £179m in tax rebates, while the multinational paid Norway £4.6bn [...] a further £342m was handed out in tax rebates to BP during the same period [...] [the UK Government have] protected big corporations' profits and their shareholders' dividends [...] [Norway is] not bailing out large oil companies.

So the argument being put forward here is that the UK government has not been taxing the UK oil industry heavily enough in the last two years - apparently that's why our tax revenues have crashed!

Now then. Maybe you remember the words of John Swinney following the oil price crash

[Swinney] called for tax cuts for the North Sea, and additional moves to encourage exploration in the basin. Swinney also wants the government to make it easier for companies to access tax relief for decommissioning projects, and consider non-fiscal support such as government loan guarantees.

Possibly you recall the words of the SNP's 2017 manifesto which stated:

Only after pressure from SNP MPs did the Tory Chancellor abolish the petroleum revenue tax and halve the supplementary charge to 10 per cent.

Maybe you read the Independence White Paper and remember that even before the oil price crash the Yes campaign wasn't arguing for more aggressive taxation of the oil industry:

"We have no plans to increase the overall tax burden on the industry on independence [...] Post-independence decommissioning relief will be provided in the manner and at the rate currently provided through the current fiscal regime" - p304

Surely BfS can't be arguing that cutting tax for an embattled oil industry to help protect Scottish jobs was a bad thing, they can't be saying the SNP was wrong to argue to maintain tax relief for decommissioning projects, to call for and celebrate tax cuts in response to the oil price crash? Well hold on to your hats, because I'm afraid that's precisely what they are doing. Here's another direct quote from the Herald piece:

BFS also claimed Westminster had squandered resources on tax advantages for oil corporations [...] 

The article goes on to say:

BFS claimed that Westminster gave tax rebates to large oil companies to decommission rigs and to explore for new oil fields.

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As an aside: Claimed? An observation of widely known and well documented fact described as a "claim"? Presumably this is to make it seem like some shocking revelation to the casual reader - it's truly feeble stuff

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I have to apologise for failing to maintain a clear logical through-line here (the "critiquing Alphabetti Spaghetti" problem) but there's a line in the article that doesn't fit any logical flow but explains why this piece has been pushed now: there's bad news coming and a distraction - however desperate - is needed

The GERS figures will on Wednesday probably show Scotland as part of the UK running a bigger deficit that the rest of the UK

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As another aside: Probably? The figures are published tomorrow and anybody with even a passing understanding of Scotland's economy within the UK knows that Scotland will definitely be shown to be running a bigger deficit that the rest of the UK. Look at this graph of historical actual data:

We know oil & gas income is effectively zero now, we know spending in Scotland hasn't been dramatically cut relative to the rest of the UK and that there hasn't been a history-making jump in Scotland's onshore economy ... so the GERS report will definitely show Scotland running a deficit (on a per capita or percentage GDP basis) far larger than the rest of the UK. The deficit gap that some of us warned about in 2014 is very much a reality.

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But back to the core argument being put forward by BfS and that Sunday Herald front-page splash.

At this point you're probably thinking "not even BfS could just look at the tax revenue generated by one country's highly profitable oil industry and suggest a country whose oil industry is on its knees should be expected to generate the same level of tax"? Well tighten the grip on your head:

[BfS said] It would not be unreasonable to add Norway’s £11bn revenues and state that would have been possible as an independent nation.

Yep, you read that right. The article explicitly states that it would "not be unreasonable" to add the tax revenues generated by another country's oil industry to Scotland's fiscal balance.

I fear I'm insulting my own readers' intelligence by explaining why that is not only an unreasonable thing to do, it's frankly a bat-shit crazy sentence to commit to print. To be clear:

• North Sea revenues are generated by taxing production profits
• While it's true that both Norway and the UK are exposed to the same oil market prices, the costs of production are very different, as are the production volumes³
• This means that the Norwegian oil industry generates a lot of profit, which in turn generates tax (and dividend) income.
• Compared to Norway, the UK industry has higher extraction-cost reserves and is now incurring decommissioning costs - there simply isn't the same profit there to tax

It's really not very complicated.

There's more. The article offers this incredible statement as part of their "Business for Scotland concludes" quote:

UK Government policy has deliberately removed one of Scotland's key revenue streams

If your brain is still able to function after trying to follow BfS "logic", I encourage you to think long and hard about this statement. This isn't an argument about revenue allocation: the suggestion is that the UK Government could have generated billions for the UK economy in the last few years if they'd wanted to - could have lessened the need for UK-wide austerity - but instead they deliberately chose not to so as to make Scotland look bad. I'm genuinely lost for words.

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Now look back at that Herald front page and the words used to describe the report within the article. There is nothing "revealed", there is no "big oil lie", the oil price isn't being "falsely used to attack the case for independence", there is no evidence based on "detailed oil price research", nobody has "contrasted the tax regimes" (they've merely observed the different tax revenues and leapt to a fantastical conclusion), there is no "in-depth analysis".

If your stomach can cope with the mixed metaphor, here's the cherry on the cake (of Alphabetti Spaghetti - I'm sorry)

This - this - is what a high profile SNP MP judges to be "excellent research"?

I just can't ...

I'm done.

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Notes

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1.  For evidence of BfS's track-record as a misleading think tank (aka Gordon Macintyre-Kemp's track-record of writing economically illiterate nonsense), see "Who do Business for Scotland Represent"; "Business for Scotland and the SNP",  "£8.3bn Better Off?", "Response to Independence & The Economy - The Facts", "Stop Getting GERS Wrong", etc.

2. Even if we did have a time machine, creating an oil fund would have required us not to spend the money when we did and instead adopt tax and spend policies more like those in Norway where - for example - healthcare is not free at point of use. I don't see the SNP championing that policy

3. In broad terms the cost (hence profit, hence government tax income) differences are are explained by geology (size and accessibility) and maturity of reserves

Here's Oil & Gas UK’s chief executive, Malcolm Webb (quoted in 2015)

After more than a decade of spiralling costs, over-taxation and weak regulation, the UK offshore oil and gas industry is now bottom of the league in terms of the cost of producing a barrel of oil and gas.  The UK’s difficulties have been greatly exacerbated by the sudden drop in oil price but it would be a grave mistake to believe that the price fall is the cause of the problem.  A recovery in the price, even to $100 per barrel, would not resolve matters

Or if you like see this thread by Fraser White or this thread by the University of Strathclyde's Stuart McIntyre. .. or just google he question, there's swathes of stuff out there on this topic