Scottish independence vote: Its hopes of survival rest mostly on its oil reserves.

Drunk on Oil: Why Scotland Thinks It Can Survive as an Independent Country

Drunk on Oil: Why Scotland Thinks It Can Survive as an Independent Country

Moneybox
Commentary about business and finance.
Sept. 12 2014 10:47 AM

Is It the Whiskey or the Oil?

Why Scotland thinks it can survive as an independent country.

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An independence supporter attends an announcement to mark getting a million signatures to the Yes Declaration on Aug. 22, 2014, in Edinburgh, Scotland.

Photo by Jeff J. Mitchell/Getty Images

With one week to go before the big referendum, it seems distinctly possible that Scotland will rock Europe by voting to declare independence from Great Britain. And like so many world-historic events of the past century, this one would have lots to do with oil.

Jordan Weissmann Jordan Weissmann

Jordan Weissmann is Slate’s senior business and economics correspondent.

Think of Scotland’s most famous exports, and chances are that whiskey comes to mind, followed maybe by wool sweaters, bagpipes, and indie-rock bands. But the region’s most valuable product is the crude oil that sits just offshore in the North Sea. In 2013, those wells yielded about 800,000 barrels of oil per day for Great Britain. That’s not a ton of black gold in the global scheme of things—North Dakota, by comparison, produces more than a million barrels per day—but it’s valuable, yielding billions of pounds in tax revenue every year. If Scotland were to file for geo-political divorce, the consensus is that it would walk away with the rights to more than 90 percent of those oil resources, along with 47 percent of the U.K.’s natural gas.

Those hydrocarbons look awfully tantalizing to Scotland’s nationalists. Politically, golf’s ancestral homeland is more liberal than the rest of Great Britain, and its voters especially dislike the ruling Conservative Party led by Prime Minister David Cameron. (In an emotional speech, Cameron himself begged his countrymen not to vote for independence just to “give the effing Tories a kick.”) In its economic case for independence, the Scottish National Party–led regional government—which is charged with handling much of Scotland’s internal affairs—spends page upon page protesting growing income inequality in Great Britain, as well as the Cameron government’s austerity budgets and cuts to the safety net. Post-secession, the nationalists picture Scotland following in the crude-drenched footsteps of Norway, which plows its princely oil revenues into a sovereign wealth fund designed to shore up its substantial welfare state.

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It’s a lovely vision, but there’s a catch: Nobody is really sure how much oil and gas is left in the North Sea, where crude production peaked all the way back in 1999, and has been declining swiftly in recent years. Tax revenue from drilling fell from £12.4 billion in 2008-09 to £6.5 billion in 2012-13. As for the future, the predictions are all over the map. The Scottish National Party has optimistic estimates based on the assumption that investing in better technology will let the industry drill more oil out of the ocean. Sir Ian Wood, a billionaire Scottish oil executive, has called those predictions a “fantasy,” and said that revenues from the North Sea “will simply not be there in 25 to 30 years’ time.” The U.K.’s Office for Budget Responsibility thinks output will be far lower than the nationalists hope.

As the Guardian soberly put it, “oil should be a crucial factor in weighing up how Scots vote on 18 September, but the scale and longevity of the country's fossil fuel wealth remains a matter of debate.”

Many have pointed out that even without its oil revenues, Scotland would be quite a rich country. “If its geographic share of UK oil and gas output is taken into account, Scotland’s GDP per head is bigger than that of France,” Mure Dickey and Keith Fray noted in the Financial Times. “Even excluding the North Sea’s hydrocarbon bounty, per capita GDP is higher than that of Italy.” The country is highly educated and has a strong finance industry along with some advanced manufacturing. Meanwhile, those Scotch exports aren’t a joke.

The problem is taxes. Scotland already gets back more in spending from London than it pays to the government, meaning its revenue base would actually have to grow a bit after independence to avoid running up its deficit or cutting spending. (Letting the deficit pile up isn’t really an option, since the pro-independence movement wants to stay on the British pound.) A major drop in fossil fuel profits would leave a gaping hole in the budget. Over the last few years, oil and gas receipts amounted to a full 16 percent of the region’s tax base, on average. By comparison, the United States only collects about a tenth of its revenue from its entire corporate income tax. Today’s Great Britain gets less than 2 percent of its taxes from oil and gas. The nationalists point out that Scotland would rely less on fossil fuels for revenue than Norway, but that’s cold comfort.

If the crude doesn’t keep flowing the way nationalist politicians hope, it could mean higher taxes, lower spending on social programs, and weaker growth. Worse yet, oil is ultimately just one of many of economic unknowns that could dictate Scotland’s future on its own. (Paul Krugman has already railed on its plans for monetary policy.) Which is why this referendum really is a gamble. In the end, oil money really is as crucial to Scotland’s independence hopes as peat smoke is to its booze—without it, much of the rationale just disappears.