A UK North Sea Oil sovereign wealth fund and other fairy tales

As long as Scotland remains a part of the UK, there will never be a Scottish let alone a British North Sea Oil funded sovereign wealth fund. The reasons why are almost entirely political.

To set up a fund now would undermine the notion Scotland benefits financially from being part of the UK especially the more vicious form of this argument that claims England subsidises public spending in Scotland. Setting up a fund now would also prompt questions about why wasn’t it done sooner like in 1990 when Norway set up what’s now the largest fund in the world. More than this it would call into question the credibility and policies of previous governments, Labour and Tory (but particularly the 1980s Tories i.e. Thatcher). Finally, a fund would have too much symbolic meaning; it would be a powerful Scottish nationalist (and Nationalist) totem and a recurring reminder that for quite some time now no Scotland very clearly hasn't been "better together".

So we won’t get one (and neither will the UK). Instead, without Scottish independence, today’s revenues will continue getting spent today, there’ll be no north sea oil funded investment in Britain and no meaningful legacy for future generations.

Instead, the best we’ll get is yet another “expert” being trotted out to claim (yet again) that future production and revenues are in secular decline (other than when they aren't - see graph/numbers above, recent headlines about record investment in the North Sea by super majors etc.,), so it just isn't worth the candle (well if its so unimportant, there'd be no harm setting one up then).

Arguments for Scottish independence part 3: Assets and practicalities

Picking thru the requirements of what an independent nation needs, Scotland is already very well placed thanks to devolution and stuff left over from the 18^th century

Here’s a brief list:

Legal system? Check.

Education system? Check (schools, universities and professional associations fer goodness sake)

Multi-party democracy? Check (plus independence would remove a tier)

National health service? Check

And so on and so on. Really, the existing infrastructure is so well developed and already sufficiently autonomous  as to render many of the practical arguments against independence redundant. Hence, much of the pro-union chat focuses on the softer benefits of the union, like how we’re better together just because we are really, and how being in the union meant Scottish people got to wear British swimming trunks at the olympics. Now that’s all lovely I guess, except the union also means being part of an electorate that voted in the ConDems and appears to support punishing the disabled.  

However, that’s another post. Getting back to the practical issues, there is one, glaringly big exception, which is the financial system and the economy more generally. This is accordingly where the more practical opposition to independence is going to town. Its also a big-big-biggie given the credit crunch and Scotland’s unfortunately disproportionate contribution to the British experience.

Except, the pro-union mentality on display really needs to get a grip. Following on from the HM Treasury propaganda, this blerk here has produced a less biased, more constructive analysis of “Scotland's currency options”. But, even then he just can’t resist the cute point scoring. Like when he talks about currency boards and describes the Irish experience as follows “Ireland chose to fix its exchange rates at parity when leaving sterling. The Irish central bank then spent the next fifty or so years defending the exchange rate until joining the ERM”, he forgot to mention sterling had a fixed exchange rate for much of the same period that HM Treasury also spent years defending i.e. the actual point here isn’t currency pegs are somehow intrinsically a bad thing, rather its what was ultimately a fixed exchange rates proved a serious constraint (by contrast a Sterling currency peg right now would be to a floating currency).

However, its when he says (in the 3rd paragraph) “An independent Scotland would have to move swiftly to create the necessary institutions and capital markets. This would include a central bank, a payments system, deposit insurance, prudential and conduct financial regulators, a debt management office, an exchequer, a tax collection agency, a fiscal commission, equity and capital markets and, of course, a currency mint.” I’m left thinking cool the beans there a minute bawjawz, cool the beans.

This is because of how he chooses to discuss an independent Scotland’s assets and liabilities. In liability terms, its about how Scotland would need to take its fair share of UK national debt with it. Now, this is an important point to make, however, the discussion of Scottish assets is less good, because it focuses almost exclusively on oil.

Actually, though, Scottish assets also include Scotland’s share of UK level institutions, you know the ones Scottish taxpayers have paid into and been governed by. As with the divvying up of the national debt – incurred partly to finance the creation and running of said institutions – giving us a bit of them would only be fair.

To give a practical example drawn from bawjawz’s willfully intimidating shopping list, establishing “prudential and conduct financial regulators” – fine, we’ll have a copy of the PRA (was FSA) rule book we helped pay for please, some 12 month secondees to the existing Edinburgh office and we’ll advertise for new staff on Monday. And yes the job adverts will big up how existing PRA staff can transfer their existing skills to a city with more affordable housing and a better commute than London.

Oh and not having such a complex financial system as London to regulate means it could well be cheaper and potentially safer to do so here given there’s only the one Scottish bank with serious, but shrinking investment bank capabilities as opposed to the teaming hordes scattered across London. Bonus! (and another example of the positioning issues affecting the pro-union lot; they, rightly, say an independent Scotland would have a disproportionately large exposure to the financial services sector, but it would also be at a remove from so-called “casino” banking e.g. a Glasgow insurance company call centre poses less systemic risk to the Scottish economy than Mayfair's hedge fund bods do to the UK. And, they probably pay more tax!).

As for some of the other stuff on the list, well bawjawz is just being silly. Take “and, of course, a currency mint”; really? Again with the memory lapse given the EXISTING Scottish note issue and the fact the Royal Mint already makes coins to order for foreign countries.

Personally, I’m increasingly left wondering why the pro-union lot is placing sooooo much emphasis on the scare tactics even when it involves making basic factual errors. In the meantime, when you run thru the assets and infrastructure Scotland already has, from a practical perspective independence doesn't strike me as an especially daunting prospect. Saying that, the 2014 Commonwealth games mascot is an embarrassment.

Arguments for Scottish independence part 2: Oil

A thing that bugs me about The Economist is its bias. Like with Hugo Chavez, in what was effectively an obituary they still found time to go on about his recklessness and his “corrupt, oil-fuelled autocracy”, but failed to mention how in amongst the grandstanding, Venezuala has a soveriegn wealth fund worth $800m.

By contrast Scotland and the rest of the UK doesn't have one at all, which makes North Sea oil, so far, an incredible, missed opportunity. Sure, go to Aberdeen and you’ll see more new build executive villas, 4x4s and giant plasma screen tellies than you can shake a stick at. But, these belong to people who – like the UK government – are spending today what won’t, evenetually be there tomorrow.

This uniquely British approach to oil dates back to the 1976 UK financial crisis that saw Britain apply to the IMF for a bail out. In these circumstances the associated rush to bring oil on shore made sense as the new revenues then helped ease immediate and pressing financial problems (the "lax" approach to health and safety this also involved is somewhat less justifiable, but does strenghten the moral case for regarding North Sea oil as a distinctively Scottish asset). Over time the UK government’s fixation with spending every penny oil generated as soon as it could became less justifiable, something that made North Sea oil forward production curves increasingly handy.  

I’ve seen loads of these production forecasts over the years, so many I just pulled the one presented above randomly off the internet without bothering to check when it was produced. This is because each one tells the same story; North Sea oil production has peaked, it’s now in decline and within a couple of decades it’ll all be gone. Given this (1) why bother setting up a soveriegn wealth fund and (2) Scotland had better stay in the union because when the oil runs out we’ll be fecked.

Except, every year when the production curves get refreshed they push the end date out another few years. The reasons why are straightforward. Well when I say reasons, I mean reason. So sure sure, technological advances are a factor, but really it’s about price. As North Sea oil is relatively expensive to produce, North sea oil production has a relatively high hurdle rate i.e. the price below which its not worth bothering about. Hence, every production curve is actually a forecast of how much oil it will be economic to produce, not how much is left. As prices rise more oil becomes economic to produce and the production curve shifts that bit further to the right. Globally, the most obvious example of this are the Canadian tar sands, which have gone from being well sand really to one of the world’s largest oil reserves.

Now, picking through the historic data what stands out is how in the past supply side shocks have driven oil prices to record highs. Now though its more to do with demand due to global economic development, most obviously Chinese economic growth. And as this isn’t going away any time soon, while oil prices will certainly move about in the future, they remain unlikely to fall back to the levels seen in the 1990s anytime soon.

This in turn means North Sea oil will be with us for a good while yet, which has obvious implications re: the Union. As no UK government has ever shown itself to be the slightest bit willing to view North Sea oil as anything other than an immediate cash cow to be milked as aggresively as possible, staying in the Union means when North Sea oil does eventually run out, the benefits of this once in a (nation’s) lifetime opportunity will already have been frittered away on tax cuts and London based legacy projects. Plus, the Scottish post-industrial experience suggests Aberdeenshire’s post-oil experience will not be pretty.

Given this independence is the only option if we want to establish a permanent, positive North Sea oil legacy. Leaving the union and establishing a Scottish soveriegn wealth fund will also address the volatility issue raised by the UK treasury in its scaremongering tosh about Scottish independence – in good years more money gets paid in, in bad years less. There. Sorted. Easy.

To put this another way, I’d rather North Sea oil revenues eventually funded the university I hope my grandchildren attend than had been pissed away putting up the millenium dome.