North Sea oil has been central to the dream of Scottish independence for decades. In the 1974 general election, the Scottish National Party won extra House of Commons seats on the back of a campaign titled “It’s Scotland’s Oil!”
During this year’s referendum campaign, the issue was central, too.
The wealth stored under the waves would buttress public spending, said the SNP, but it would also enable Scots to set up their sovereign fund to hold some of its fruits for future generations.
Such arguments were subjected to ferocious attack. Undoubtedly, tax revenues would pay for some of Scotland’s current spending, but the claims that it could do that, plus form the basis of a savings fund, were a nonsense, claimed critics.
The SNP predicted that oil would be selling now for $110 a barrel. Unusually, however, it forecasted that the price would stay constant over the next five years.
Yesterday, North Sea Brent crude traded at one point at $64.24.
Today's oil prices are perhaps not the issue, but rather the prices in 2016 – the first year of an independent Scotland if a majority of voters there had not decided otherwise last September.
Exploration
The statistics available cover exploration in all of the UK’s waters, but the majority takes place in the North Sea. And the majority of that – about 96 per cent of oil production – takes place in what would be Scottish waters, if it ever goes independent.
However, less than half of all of the UK’s gas production comes from Scottish waters, according to the University of Aberdeen – but these numbers can change depending on the year.
Predictions about oil are usually wrong, so the SNP is joining a long queue of people. However, the significance of being wrong may prove important if, as some now suggest, the world is now facing an era of cheap oil.
Between 1991 and 2008, tax receipts from the North Sea grew strongly, reaching £12.4 billion, on the back of prices reaching an all-time high in 2008 and higher tax rates brought in by Gordon Brown in 2006.
From 2009, however, revenues have fallen off a cliff, from £6.1 billion in 2012-13 to £4.7 billion in the last financial year and to £2.8 billion in the one ending next April. The drop equals roughly half of what Scotland spends each year on education. Some of the fall is explained by tax deductions due to oil companies for the £14 billion a year they have spent on new fields over the last couple of years – which cuts tax receipts in the hope of larger ones in years to come.
Saying that future North Sea exploration and production are "very sensitive" to price falls, Scottish oil expert Prof Alex Kemp says that the current fall "has come at a particularly unfortunate time".
Price drop
The price drop was a particular surprise, given “actual and potential” disruptions that could easily occur in several major producing countries, says the University of Aberdeen-based academic.
And it may not be temporary. Global demand is “very subdued” and “buoyant” supplies are available from the US where shale is becoming increasingly significant. Some producers may increase, not cut, production.
Meanwhile, Kemp warned that banks are rationing lending for energy giants. Projects must show that they can survive at less than $75 a barrel.
However, North Sea projects are competing for cash that has other places to go.
The North Sea fields are ageing. New discoveries are being made, but they are smaller than before. Existing fields are also becoming more expensive to run, and more prone to breakdowns.
In its report, the Office of Budget Responsibility believed that oil and gas tax receipts would fall by £100 million between 2014-15 and 2019. Production would stay flat, but tax receipts would be buttressed because energy companies will have used up their write-offs.
However, the figures from the independent budget watchdog are already significantly out of date for now, since it was based on a $100-a-barrel price this year. North Sea crude, they estimated, would fetch $85-a-barrel for the rest of the decade.
Former Scottish first minster Alex Salmond brushed off questions this week about the SNP's figures, saying that only in the UK could people regard a natural bounty worth "a thousand billion" as a negative.
Such arguments are simplistic, to put it mildly. Oil prices inevitably go up and down, and will do so again, but the SNP will find it harder to persuade middle-ground Scotland that independence is a runner if cheaper oil becomes a trend.