The Treasury’s official forecaster expects the Treasury to receive just £2bn in tax revenues from the North Sea oil industry over the 20 years after 2020 due to the collapse in the global oil price.
The independent Office for Budget Responsibility (OBR) made the shock prediction in its latest fiscal sustainability report. This time last year, before the near halving of the price of a barrel of Brent crude, the OBR was expecting the industry to generate around £37bn in tax revenues between 2020 and 2040.
The change underlines how the seismic shift in the global energy markets will affect the UK’s public finances and pose a serious challenge to the Scottish National Party, much of whose case for an economically flourishing independent Scotland rests on the premise of abundant revenues from the North Sea.
At the time of the March Budget, the OBR lowered its forecast for oil revenues over the five years to 2020 from an average of £2.6bn a year to £700m.
Its latest forecasts actually suggest that the contribution to the Treasury from the North Sea will turn negative in the 2020s as companies offset trading losses and rig decommissioning costs against tax.
The OBR’s projections for the global oil price are based on those of the US Energy Information Administration, and in its central scenario it sees a barrel of oil rising from the present level of $65 to $70 by the end of the decade. Thereafter it is seen as increasing to $115 by 2040.
However, the OBR stressed the difficulty of predicting oil prices and tax revenues. “North Sea revenues have been the most volatile receipts stream and are subject to large forecast errors, even over the short-term,” it said. “These projections are therefore subject to considerable uncertainty. It is quite possible that the industry’s response to conditions that currently prevail could lead to very different outcomes.”
The OBR’s forecasts follows analysis from the Institute for Fiscal Studies in March suggesting that an independent Scotland would face a net fiscal deficit of 8.6 per cent of GDP in 2015-16, versus a UK deficit of 4 per cent.
Labour’s shadow Scottish Secretary, Ian Murray, said the forecasts “highlight the madness of full fiscal autonomy for Scotland”.
But a Scottish Government spokesperson said: “The OBR themselves state that these projections are ‘subject to considerable uncertainty’ – and the figures reflect recent low oil prices, which some forecasters have predicted will bounce back.”
The Scottish Government also pointed out that the OBR assumes just 8.7 billion equivalent barrels of oil will be produced over the period to 2040, while others have estimated the remaining North Sea stocks at up to 24 billion barrels.
Elsewhere in the fiscal sustainability report, the OBR estimates that an ageing population will place additional demands on UK public spending over the next half century and put the national debt-to-GDP ratio on a rising path from the late 2030s onwards.
It estimates that to stabilise the national debt at 40 per cent of GDP in 50 years’ time would require a 0.4 per cent of GDP tightening of fiscal policy each decade.Reuse content