Tuesday, 22 August 2017

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).

***

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.

***

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.


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


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


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.


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.

***

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.

***


Notes

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






14 comments:

Steve Sayers said...

Yes, head bleeding stuff. But continually swallowed by the great uninformed as you oppose their point of view and their politicians and winged wonders feed them crap.

Anonymous said...

and so to summarise.

You can't refute the argument so you'll shoot the messenger.
Dear God you Brit Nats have lost the plot.

Tick Tock Not long now ..#ScotRef

Iain said...

The reason this 'works' for the Sunday Herald is because their target audience is starting with a presumption that a) Westminster is working to frustrate independence and Scotland's interests generally; and b) Oil would make an independent Scotland vastly wealthy and if it doesn't show up in the numbers it's because shenanigans have taken place.

The headline fits with the readers' understanding of the situation, so critical analysis is disengaged.

Drew said...

While you are correct to point out the inaccuracy of this article and the miscalculations of oil prices by Nationalists in relation to public revenue and spending, Unionists tend not to avoid discussing the primarily role of oil, which is as a vital energy source which the UK is almost totally reliant on for powering the economy.

Most oil is used for transport (car, lorries and planes) but a fair chunk is also used for heating, chemical plants and in a range of other everyday household products like plastics.

Put simply, the UK economy would suffer a pretty major shock without easy access to oil because it is so reliant on petrol for business logistics and getting people to and from work (See the major economic disruption brought in just a few weeks to supplies of food and essentials during the fuel protests in 2000).

Oil in the UK currently comes mainly from the North Sea Forties oilfield east of Aberdeen and the Brent oilfield east of Shetland which are in Scottish territorial waters.

If Scotland was independent in the near future, then rUK would be almost totally reliant on importing oil from a separate country, Scotland.

As border crossings and customs posts would exist post-independence, the UK would either have to have a deal in place to buy and access oil produced in Scotland or buy from another country like Russia or the Middle East.

Or there could of course be new oil dicoveries in rUK waters or alternative fuels are found in the future.


Anonymous said...

How can Norway's production cost per barrel be almost half that of the UK

Martin Brooks said...

It's Joanna Cherry that really gets me, she's a QC for goodness sake, she knows that if she put Gordon Macintyre Kemp up as an expert wintness in any case about oil economics or business for that matter the judge and the oppossing QC would laugh her out the room yet somehow her professional ability of appraisal and critical thinking are redundant when tweeting to the masses. How mendacious can you be?

Oilman1 said...


Good analysis (?) of a report(?)
The only thing that surprised me is that the herald actually ran it,

I agree bat shit crazy

Oilman1 said...

Drew.
fracking.
PS my name gives it away

Unknown said...

The worse part is this guff has been on bfs website for ages so hardly an exclusive for the SH.
Such lazy journalisim, I bought the SH to read all about how I have been duped by Westminster and instead found I had paid good money for a dross article.

Clarke McKelvie said...

The worse part is this guff has been on bfs website for ages so hardly an exclusive for the SH.
Such lazy journalisim, I bought the SH to read all about how I have been duped by Westminster and instead found I had paid good money for a dross article.

Drew said...

Oilman

While Shale gas could well provide a reliable alternative energy source, the UK is far less spread out in size than the US. Fracking in Surrey's commuter belt for example will present more challenges and planning issues.

Can Shale gas be used as a fuel for cars, the haulage and logistics industry?

If so, vehicles will need modifications which will be expensive.

AndrewC said...

Good Morning Kevin

I see you have had the misfortune of trying to interpret Murphy's ramblings. I won't say trying to debate with him as that is like fighting a blancmange. He will claim that the sun rises in the North, you will point out it doesn't, he will accuse you of being a pedant and then claim it was obvious what he really meant.

I have no training in economics but do have in tax. I'm an ex-HMRC trained Tax Inspector and have a career in tax advice. And Murphy is most definitely NOT a tax expert. Opinionated for sure, he is about everything, but his knowledge of tax law and practice is of the "wafer thin just enough to know more then the general public" variety. Tax and accountancy are two very different knowledge areas and Murphy trained as an accountant. Time and again on his blog he has shown he just doesn't have a tax background. Most recently he managed to get completely wrong a CGT query I posed (using a false name, having been banned so often fro daring to have contrary views to his). It really was very very basic. He didn't know about a relief called 'lettings relief'. You'd kick a trainee up the arse for getting it wrong. he even managed to bluster about having 'forgotten it' which would be like someone claiming to be a car mechanic who had forgotten about spark plugs.

Anyway, just so you know. He knows as little about tax as he does about economics. He is the ultimate snake-oil salesman, saying he can cure anything with his bogus remedies, believed only by those desperate to believe.

As others have commented, is there anyone around who knows so little about so much?

Cheers

Andrew C

Salamander said...

https://wingsoverscotland.com/the-magic-money-rigs/

Where do these mad assumptions fall down ?

Kevin Hague said...

Well mainly because those RTS stats have nevered been used to calculate Scotland's share of tax revenues in GERS and indeed I'm not aware of a single claim, analysis or even comment made during indyref or related to Indy debate where RTS data has been used to make a point.