The recent GERS figures for Scotland’s fiscal balance in 2014-15 were entirely predictable. For the first two quarters of that financial year, oil prices averaged around $100 per barrel. Revenues from North Sea oil were flowing strongly. During the next two quarters, the oil price averaged around $50 per barrel and revenues stalled. The reduction in oil revenues from Scottish territorial waters between 2013-14 and 2014-15 was worth £2.2 billion - 10% more than the entire yield from council tax or equivalently, 10% more than was spent by greater Glasgow and Clyde Health Board on healthcare in the West of Scotland in 2014-15. 

 

The case for Scotland’s fiscal independence has been built on highly volatile natural resource revenues. Events in world oil and gas markets over the last 18 months have seriously undermined this case. There will be no relief during the 2015-16 fiscal year just ending because the oil price has averaged closer to $30 per barrel in the last 12 months. 

 

In the longer run, no one can predict accurately the oil price. There is huge uncertainty around the world’s economic prospects. Faster growth would boost demand for oil. But in addition, more efficient use of petrochemicals and the growing pressure to decarbonise the world economy may moderate demand and reduce the likelihood of prices returning to their 2008-09 levels, when Scotland’s oil revenues would have been £11.6 billion compared with the paltry £1.8 billion collected in 2014-15.

 

The volatility of oil revenues would certainly have caused difficulties for an independent Scotland. Given that yesterday’s estimates suggest a non-oil deficit in 2014-15 of 11.9% of GDP, it would have faced severe financial challenges from the outset, encompassing both the level of spending and the volatility of revenues. One possible solution for the volatility element, which was suggested during the referendum campaign by colleagues at the National Institute of Economic and Social Research, would be for Scotland to sell its future oil revenues on world markets. This would transfer the risk to players more willing and more able to deal with huge fluctuations in revenues than the Scottish electorate. Scottish public spending could not possibly be allowed to vary in line with variations in oil revenues. Surprisingly, this proposal received very little attention during the campaign.

 

However, the trouble with the strategy of selling future oil revenues is that it may have made sense in 2014, but perhaps its time has now gone. Recently quoted prices for oil deliverable in 2024 was $51 per barrel. This does not suggest that the markets see any significant recovery of the oil price over the medium to long term. It follows that the GERS accounts are unlikely to show any significant recovery in Scotland’s oil revenues in the short to medium term. A more robust fiscal balance sheet for Scotland will have to be based on improvements in revenue from sources other than oil and/or cuts in public spending.