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

Alex Salmond's Shameless £8bn Lie

Alex Salmond has declared his intention to stand in the constituency of Gordon in Aberdeen for a Westminster seat at the 2015 General election. The voters of Gordon should be aware that our erstwhile First Minister is quite happy to lie to win votes.

If you think that's an extraordinary accusation, let's take a look at his assertion that Scotland would have been £8bn better off over the last 5 years if we had been independent.  He certainly repeated it often enough.

May 2013 on the Today Programme

• "Alex Salmond was in ebullient form on the Today programme this morning, rattling off statistics showing that over the last five years, an independent Scotland would have been £8bn better off" - New Statesman
• "Speaking on the Today Programme, Scotland’s First Minister Alex Salmond [...] Over the last five years, Scotland would have been £8bn better off if it had been independent, he claimed" - Local Government Chronicle

March 2014 during First Minister's questions

• "12.08: "Over the past five years we would have been £8bn better off" if separate from the UK, Salmond says." - The Telegraph 
• "Mr Salmond repeatedly drew attention to Scotland's relative strength over a five year or indeed 30 year period. Scotland, he said, could have been £8bn better off over five years if in sole charge of her resources." - BBC News 

August 2014 during the Live Leaders' Debate on STV

• "Over the last five years we have £8bn more into the Treasury than we have had out of it, in relative terms. That is £1,500 a head for every man, woman and child in Scotland." - Evening Times & Belfast Telegraph 

August 2014 during the Live Leaders' Debate on BBC1

• AD: "....for 22 out of the last 23 years Scotland has spent more than is got in"
  AS: "that's not true .. in the last 5 years relative to the United Kingdom Scotland was £8bn better off or would have been as an independent country, Alistair you know that because it's in the GERS figures" - Broadcast Footage

Of course where the First Minister leads, his loyal supporters follow; Business for Scotland worked it up into this slide for one of their risible You Tube videos

So this wasn't a one-off slip - the £8bn figure was drilled into the consciousness of a significant proportion of the electorate.  Those who believed it were gulled.

I highlighted these outrages against data at the time of course (The £8bn Misdirection and  £8.3bn Better Off?) but this blog can hardly challenge the SNP's PR machine (and - I have to say - the failure of either the Better Together campaign or the Main Stream Media to call him out on it).

Checking these figures is a very straight-forward exercise: the argument has nothing to do with changes to expenditure - it is simply about "more into the Treasury than we have had out of it, in relative terms -  we are talking about historical actual figures and we know there is no debate about how costs or revenues were allocated as GERS is the source cited (by both Salmond and Business for Scotland).

GERS numbers are really straight-forward but Twitter debates have taught me not take anything for granted when it comes to people understanding the figures so bear with me;

• The GERS figures present "Scotland" and "UK" - the figures for UK of course include the figures for Scotland.  For those who care I repeat the analysis using rUK = [UK - Scotland] at the foot of this post; it doesn't make much difference.
• We are using "Geographic Share of Oil Revenue" - this means the figures for Scotland include "our oil" using the Scottish Government's favoured geographic share definition. The figures for UK include Scotland and therefore of course include all Oil revenue. The repeated version of the analysis showing rUK figures is included at the foot of this post for those who want to see rUK without "Scotland's" oil revenue.  Again; it doesn't make much difference
• Because the quotes I have cited cover a period during which new GERS figures were published (12/03/2014) I show the two different versions of "the last five years" that will have existed

The actual data set we need is very simple

• We need two numbers for each year for each of Scotland and UK
• What we pay "into the Treasury" = Tax receipts
• What we have "had out of it" = Public Expenditure (Total Managed Expenditure)
• The only other figure needed is population to allow us to define Per Capita figures (so we can compare numbers in relative terms) 

The other figures are simply a function of these data and are presented below in the simplest form I can manage whilst still providing audit trail clarity.

  

You won't see the £8bn figure in this table because that claim is transparent nonsense.  The observations we can fairly make are as follows;

• Over the 5 years for which the data existed when Salmond made his assertions in May 2013 (and possibly for his March quote) the difference between Scotland's deficit and that of the UK was  an average of £112 per person per year or "in relative terms" £2.9bn over 5 years
• Over the 5 years for which data existed when Salmond was making his assertions on the TV debates the the difference between Scotland's deficit and that of the UK was an average of £49 per person per year or "in relative terms" £1.2bn over 5 years

The figure was never £8bn.  In fact by the time he was speaking to his biggest audience during the TV debates the true number was £1.2bn or an average of £49 per person per year.  I think its fair to say that £49 per person is not a figure that has stuck in the minds of #the45.

I've highlighted the £1,515 as we often hear that Scotland contributes £1,500 more per person in tax than the rest of the UK.  If you attribute Scotland its geographic share of oil revenue that was true in 2011-12; the 2012-13 figure was £797 (which meant that the additional tax revenue generated generated fell well short of the additional public expenditure received, hence Scotland was running a higher deficit per capita than the rest of the UK in 2012-13).

The chart below shows these per capita deficit comparisons in graphical form (remember in all cases Scotland is given the benefit of its geographical share of Oil revenues).

    
Note the higher volatility of Scotland's deficit (because of the higher dependency on Oil revenues) and that in the most recent year Scotland ran a materially higher deficit per capita than the UK.  Of course with oil revenues plummeting we can expect that relative deficit to have deteriorated even further when we see the 2013-14 figures - but Scotland voted to remain in the UK so we are protected from the implications of that.

But I'm drifting away from the £8bn lie.  As a result of my blog post at the time (The £8bn Misdirection) and a live radio debate (John Beattie's Radio Scotland show) with a representative sent by BfS we know how the Yes campaign try to defend the £8.3bn figure. Read that blog post and the comments to-and-fro with Ivan McKee of BfS if you don't believe me but what follows is honestly how they get there (the radio debate also confirmed this but unfortunately is no longer on iplayer).

There are only two figures we can alter to make an hypothesised independent Scotland £8.3bn better off;

• Tax Receipts: the GERS figures already give Scotland all of our attributable tax revenue including Oil revenues. Nobody suggest this number should change when explaining how we would have been £8bn better off
  
• Public Expenditure: the argument that explains "£8bn better off" is based on having the same share of Expenditure as our share of tax receipts - that would mean spending £8.3bn more

So Alex Salmond's hypothesised independent Scotland would have been "£8.3bn better off" by spending £8.3bn more and running an even higher deficit.  As a direct implication, instead of being responsible for our population share of the debt we would responsible for our Tax receipt share (we are allocated our cost of the debt on a population share basis). 

Alex Salmond was saying that over the last 5 years an independent Scotland could have spent £8.3bn more, run an £8.3bn higher deficit than the GERS figures show and been responsible for an additional £8bn debt.  He either thinks that would have meant we'd have been £8.3bn better off or - as a qualified economist - he knows that's nonsense and he's willing to lie to win votes.  That should maybe give the voters of Gordon pause.

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Below - for completeness - the longer form analysis comparing Scotland to rUK.  It makes very little difference.