Consciousness of Sheep
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Scottish independence might be one of the less obvious victims of the US fracking boom if figures included in the UK government’s Autumn Statement prove accurate.
In the run up to last year’s independence referendum, much of the economic case for independence revolved around the belief that the Scottish oil industry would be as profitable in future as it had been in the past. In 2010, the industry had provided the UK treasury with tax receipts of more than £11bn – more than enough to underpin the economy of an independent Scotland. But that was before the US Fracking bubble was inflated.
Although the mainstream narrative is that OPEC in general and Saudi Arabia in particular have deliberately increased oil production in order to halt American fracking in its tracks, this is far from the truth. While Saudi production has increased in recent months, it was actually falling when prices began to fall. In August 2013 Saudi Arabia was producing 10.24 million barrels per day. By June 2014, with prices crashing, production had fallen to just 9.69 million barrels per day, and only rose to 10.24 million barrels a day in June 2015. In fact, the current global oil glut is more the result of collapsing demand in the OECD and the dramatic slowdown of industrial production and infrastructure development in China. The additional oil production resulting from fracking in the US merely exacerbated an already difficult economic situation.
Once prices began to fall, the rational course of action would have been for US producers to slow their production. Unlike the fast-depleting OPEC oil fields, US shale wasn’t going anywhere. So on paper, waiting for prices to rise again before drilling new wells would make sense. However, both the technology and the economics of fracking work against this. Unlike conventional oil fields, shale deposits deplete rapidly – losing 80-90 percent of output in just three years. So just to maintain production requires constantly drilling more wells. This has to be done just to service the loans taken out to fund the fracking industry back when oil was selling at more than $100 per barrel. Put simply, if companies were to stop – or even slow – production today, they would face bankruptcy tomorrow. So despite global oversupply amounting to around nine months worth of consumption, the frackers will keep drilling until Wall Street pulls the plug.
The obvious impact of over-supply is the prolonged fall in oil prices from $114.80 in June 2014 to $45.43 today. Less obviously around the world there has been a process of capital destruction and investment flight as the oil industry can neither maintain profitability in existing production nor attract investment in future (inevitably more expensive) recovery. Rigs have been scrapped, refineries demolished, engineers and technicians laid-off. In the UK, the government has had to offer increasingly generous tax breaks just to keep the industry profitable. And as the industry becomes less profitable, the economy it underpins begins to collapse. Even as recently as 2014/15 the UK government enjoyed tax receipts of £2.2 billion. But next year (2015/16) the UK government expects just £130 million!
Of course, there is more to independence than immediate economic indicators. Nevertheless, with North Sea oil and gas production in decline and with investment flight from future production, it is not just Scotland’s economy that looks weak. The UK economy as a whole can no longer bank of North Sea oil and gas to underwrite its public spending – still less the repayment of its government’s £1.6 trillion of public debt.
