How to counter the ‘curse’ of North Sea oil

Economics has been characterised as the “dismal science” and Gordon Brown, the Chancellor, did little to dispel that image with his statement in the Budget that tax revenues from North Sea oil had failed to reach his earlier forecasts.

However, taking a broader and longer view, there may be more reasons to be cheerful about the potential contribution that North Sea oil can make to public finances.

First, it is not just Scotland that can expect the volume of oil production to decline. Some estimates of oil supply suggests that global oil production may already have peaked.
Second, while price and conservation pressures may encourage further search for ways to economise on oil and find substitutes (or part-substitutes such as hybrid technology), there is a limit to what can be expected for the foreseeable future.

Third, there is soaring demand for commodities such as oil from the booming economies of Asia, especially China. Short of some cataclysmic political reversal (in which case the price of oil will be the least of our worries) this may be regarded as a trend that can be expected to continue for some time.

Simple economics suggest that if the supply side is expected to tighten while the demand side races ahead enthusiastically, then the price of whatever you are talking about will tend to go up – the value of this natural resource, and its potential contribution to the public finances, may hold up rather better than might be thought from just looking at gloomy predictions about declining future levels of production.

At this point I can revert to stereotype. There may be reason to be gloomy, or at least cautious, regarding the contribution of oil to the economy in the absence of policy changes – even given the likely benign future influences I have just discussed.

Scotsman