OUR ECONOMY MUST ADAPT TO HARSH REALITY

‘We have moved from shortage to a glut’

FINANCIAL predictions are by their nature a precarious art. However, the scale of the OBR downgrade to predicted tax receipts from North Sea oil is simply breathtaking. With the projected yield expected reduced from £3.5billion to only £0.7billion by 2019-20, how can it, at the stroke of a pen, have changed its mind so totally – and can we have any confidence in the new prediction?

Firstly, the fall in the price of oil has played a significant part in the new forecast. Secondly, in an attempt to support the industry at the last Budget, George Osborne cut the rate of petroleum revenue tax from 50 per cent to 35 per cent. But while this helped at the margin to protect investment, it also hit projected tax yields. Thirdly, the North Sea is a mature and high-cost exploration zone by the nature of the hostile offshore geography which is very expensive to exploit.

It i s always disproportionately impacted in times of distress in oil prices across the world. Marginal investment dries up as production costs make it uneconomic and this will increasingly be the case.

In contrast, many onshore Middle Eastern fields with production costs of less than $10 a barrel are unaffected so companies will increasingly target these areas.

These three factors have led to the OBR’s greatly reduced expectations. Sadly they are probably correct. So what can be expected going forward?

The OBR admits that oil revenues are notoriously volatile and difficult to predict. Who can second guess OPEC’s motives or IS’s progress? But new technologies, fracking in particular, have also changed the game. We have

Terminal decline: North Sea revenues are set to plummet moved from a shortage of oil to a glut and that does not look like going away any time soon.

The effects of the slow decline of the industry will not be felt equally across Scotland. Aberdeen and the surrounding area cannot escape its impact regardless of Government support.

The region has been totally transformed in the past 40 years because of the oil industry. Now it must transform itself again.

Scotland needs to court friends and diversify. Our nearest neighbour, England, would be a good place to start. It is time to call a halt to constant calls ‘that we don’t get a fair deal ’ .

We do, and placing our bet on oil is not an option. We need a much more balanced approach, but perhaps the wretched blessing of oil and now its decline may provoke that necessary change.

Ewen Stewart is director of the independent economics consultancy Walbrook Economics.