Saturday, 21 June 2008

Scottish Agenda: Don’t pin Scotland’s future on high oil prices

From The Sunday Times

June 22, 2008

A new report on Scotland’s economy should be used as a starting point for a debate on the country’s fiscal future

John Penman

Given the seemingly unstoppable rise in the cost of energy, I am astonished that the government is not trying harder to harness power from the waste heat generated by some of our politicians.

The Government Expenditure and Revenue Scotland (Gers) statistics for 2006/07 finally came out last week and had our MPs and MSPs been wired up to the national grid, I am sure the sound of their fury/delight/ambivalence would have been more than enough to power a small town for a couple of days.

“Game set and match for the economics of independence — Scotland’s black gold is plugging the Treasury’s black hole,” said Stewart Hosie of the SNP, pushing the cliche needle off the scale.

But if that was really the case, how come Liberal Democrat Tavish Scott claimed it proved Scotland was financially dependent on staying part of the UK?

Well, according to Gers, without North Sea oil revenues there would be a £10.2 billion deficit, while with a geographical slice of the oil money there would be an £800m surplus. So everyone is right and everyone is wrong.

Gers was instigated by the Tories 16 years ago amid the suspicion that it was designed simply to illustrate Scotland’s financial dependence on the rest of the UK, so it is little wonder that now the nationalists are in charge, the suspicion is that it is effectively promoting the opposite.

You may well wonder whether any of this is important, especially when many Scots firms are simply worried about getting through the next few months, but we will have to get used to more of the same in the next few years.

The only show in town seems to be whether the SNP can convince the electorate to back Scottish independence by 2011 and they can do that only by pressing the economic benefits.

With oil prices rising fast, this is the time to do it. When the information for Gers was being collated, oil was $60 (£30) a barrel, so its subsequent rise to a high of $140 suits those promoting separation. But oil is volatile and was under $10 a barrel a decade ago, so it would be foolish to pin our lives on the belief that it will continue to stay in the stratosphere.

Then again, it is true that if Scotland was independent, we could do whatever we wanted with all that lovely oil cash.

The Centre for Public Policy for Regions’ view is that this report should be used as a starting point for a debate on Scotland’s fiscal future rather than conclusive evidence one way or the other.

I agree, but it is vitally important to widen that debate to include other key proposals which would have an impact on Scottish businesses.

Glasgow City Council and the CBI are not obvious bedfellows but last week both condemned the Scottish government’s plans for a local income tax (LIT) to replace the council tax — and with good reason.

Worries about LIT are something business people raise with me on a regular basis, and I am not aware of any business organisation that is actively promoting it.

There are some who claim that the Nats realise the full extent of these difficulties and would be happy to drop their plans but, even if that is the case, I doubt whether they could actually do so without serious political damage.

Instead, from what I hear, if the SNP still pursue LIT all the way to legislation, they will simply not gain the backing from the supporters they expect in Parliament.

That would be a good outcome for Scottish business. The last thing Scotland needs during a period of economic difficulty is a local tax plan that would be complicated to implement and would almost certainly discourage investment.

When you add the government’s plans to replace the private finance initiative with something that still seems rather vague and no better, there are many issues that need to be properly debated and not left to the pointless, political ping-pong we witnessed last week.

Oil floats to top

Speaking of oil, less than three years after listing on the Stock Exchange, oil services company Petrofac is set to enter the FTSE 100 this week following a quarterly reshuffle.

The £2.3 billion business, which builds and designs refineries and oil industry apparatus, also issues an interim trading update this Tuesday.

Petrofac, which has extensive operations in Aberdeen employing thousands of people, has its key markets in areas of the world such as the Middle East, Caspian Sea and Africa, where there is increased exploration and construction expenditure.

It recently won a string of good contracts. The latest is a deal to operate a floating production, storage and offloading vessel called Northern Producer worth £15 million a year.

Not surprisingly, most of the listed Scottish oil- and gas-related companies are doing well on the market.

Cairn Energy ended the week on 3146p, which is not bad from a year low of 1627p, while Venture Productions ended on 847p from a year low of 580p. Oil services firm Wood Group ended the week on 457p, around £1 higher than it was three months ago.

This time last year, oil, gas and mining accounted for a little over a fifth of the

UK equity market. Today, these two sectors account for a third. That is one reason why I think we will see a raft of oil services companies coming to the stock market in the next year or so.

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