By Gordon McIntyre-Kemp
Ian Taylor, the No Campaign’s largest donor, wrote an article in The Sunday Herald last week explaining “Why he gave the No Campaign £500,000”.
The donation itself has caused some heated political debate (around the fact that he is not registered to vote in Scotland), but since this site is a professional business and economics online magazine, we will focus on the economic claims Mr Taylor makes.
By Gordon McIntyre-Kemp
Ian Taylor, the No Campaign’s largest donor, wrote an article in The Sunday Herald last week explaining “Why he gave the No Campaign £500,000”.
The donation itself has caused some heated political debate (around the fact that he is not registered to vote in Scotland), but since this site is a professional business and economics online magazine, we will focus on the economic claims Mr Taylor makes.
It is clear that Mr Taylor now has a vested political interest in presenting the worse case scenario, in terms of Scotland’s future oil revenues. That said, he is also the CEO of Swiss oil trading company Vitol, and so people would tend to believe that he might have an expert grasp of the facts when it comes to quoting oil price forecasts by foreign governments, but the figures he quotes appear to be wrong, and by a good margin.
In his article, Mr Taylor pours scorn on the Scottish Government’s oil revenue forecasts; he writes that in his opinion the Scottish Government’s 2014 oil price projection of $113 per barrel (Brent Crude) is over optimistic – (not an opinion shared by most experts though).
But he then writes:“Norway, so often held up as an example, are planning on an oil price of $77 a barrel in 2014.”
From previous research I knew this wasn’t right, but I like to be 100% sure that the data I reference when discussing the economics of Scotland is rock solid. So I picked up the phone and asked a representative of the Norwegian Ministry of Petroleum and Energy to confirm the actual figures.
The Real Norwegian Government Forecasts
In the short term the Norwegian Government is forecasting an oil price of NOK 650.00 this year which (at todays rate of exchange) would amount to $113.55 dollars per barrel and NOK 635.00 or $111 per barrel in 2014. Those numbers match very closely the Scottish Governments forecast and is $36 and $34.00 a barrel higher than the rate suggested by Mr Taylor.
So how did the No Campaign’s Mr Taylor get his numbers so badly wrong?
The figures used in the article appear to be considerably out of date, and may be referencing the Norwegian Government’s previous long term forecast, which was issued in 2009, (at the height of the global economic slowdown). That out of date forecast, estimated an oil price of NOK 435.00 in the long term (beyond 2040), so roughly $77 per barrel. The current long term forecast for 2040 and beyond is NOK 525 or at todays rate of exchange $91.72 per barrel. However that doesn’t even relate to the 2014 forecast referenced by Mr Taylor.
So was he referencing an out of date forecast or just wrong? Either way he stated a figure for 2014 that is $34.00 less than the current actual Norwegian Government forecast and that level of inaccuracy is just not acceptable in a debate this important.
Norwegian Cautiousness
Norway often undervalues the future oil price in its very cautious oil price projections and then tends to over perform. This is a luxury they can afford as in 1998 the Norwegian Government decided to set aside increased revenues from the good years to make sure that any future downturns in production or price wouldn’t have a negative effect on the Norwegian economy (a policy supported by the SNP but rejected by the UK Government for more than thirty years).
The Norwegian oil fund worth around $712bn is one of the largest investment funds in the world – known as Norges Bank Investment Management (it is part of Norway’s central bank) – and has just enjoyed its second best ever year last year as rising equity values helped it to a return of 13.4 per cent. The fund increased in size by NKr504bn in 2012, with NKr276bn coming from set aside oil revenues.
Not Optimistic but Realistic
So is the Scottish Government figure for $113 per barrel optimistic and over priced?
Well it seems to be extremely close the Norwegian Governments cautious figure, but it is worth also noting that the OECD is forecasting a 2017 oil price of $150 per barrel, the UK and USA Governments around $130 per barrel. Much is made of the OBR forecast of $92 dollars per barrel but the UK Government Energy Department has ignored that as pessimistic and is forecasting $130.00 per barrel.
Add to this the forecasted increase in productivity following record levels of investment in the North Sea and Atlantic fields, (expected to kick in around 2016/17) the lower end estimates would mean Scotland could have a similar net revenue situation as today in its first few years as an independent country. However if the UK / USA Government forecasts are right, that would mean an oil boom for Scotland that would go a long way to clearing our share of the UK debt and enable us to start our own oil fund and follow Norway’s excellent example.
In terms of the expected increase in oil production, don’t just take my word for it; speaking on Good Morning Scotland, Vince Cable the Business Secretary stated last month:
“I think that in past there’s been a little bit of an assumption that it (North Sea Oil) had been taken for granted. Also a belief that it was declining, and it isn’t declining, it’s got great prospects.”
London based industry body Oil and Gas UK Chief Executive Malcolm Webb said:
“Record investment is forecast this year to search for and produce UK oil and gas reserves. This will be followed by an upturn in production from 2014, sustaining growth across the supply chain and reinforcing the industry’s already significant contribution to the UK economy.”
Conclusion
Even if the lower end price forecasts are correct, I believe that the increase in production will at worst normalise tax revenues at today’s levels and that is pretty much the worst case scenario for the next few years. Not the best possible, but the “most likely” scenario is that Scotland is set for a new oil boom, or as Vince Cable puts it: “It has great prospects”.
The No campaign’s major backer, Ian Taylor, has charged into the Scottish referendum campaign (in which he doesn’t have a vote), and basically got his numbers completely wrong. Then again, not checking their assumptions against facts seems to be par for the course for the No campaign.
Further reading
Oil: boom times ahead? – Herald Scotland
Britain has squandered the golden opportunity that North Sea oil promised – The Guardian
Up to date Oil pricing data supplied by Norwegian Ministry of Petroleum and Energy
Why I decided to give The No Campaign £500,000 Sunday Herald
This article appears courtesy of Business for Scotland
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