CPPR claims on oil estimates challenged by leading academic
By Bob Duncan
A Glasgow based think tank’s claim, that figures it used in a report into future north sea oil receipts were in line with those of a respected Professor of Economics, has been challenged by the academic.
Professor Alex Kemp has questioned claims of broad agreement after the Glasgow-based Centre for Public Policy for the Regions (CPPR), said estimates from the Office for Budget Responsibility (OBR), on which its report was based, were “roughly consistent” with those of the academic.
According to Professor Kemp, the estimates used by the CPPR are "pessimistic" compared with his own forecasts.
Professor Kemp’s comments follow publication of a report co-authored by the CPPR’s John McLaren and Professor Jo Armstrong. According to Armstrong and McLaren, who is a former Scottish Labour party advisor, Scotland’s economy faces significant deterioration over the next three years due to a fall in tax receipts from north sea oil.
Scotland currently has a stronger economy than the UK and would have a smaller deficit if independent. However according to the CPPR report, with falling oil and gas receipts then, "the reverse is likely to be true, implying a position that would lead to greater tightening of austerity".
The CPPR admitted that an independent Scotland could mitigate the effects of fluctuating oil prices if it set up a sovereign fund. However it warned that diverting oil receipts into such a Norwegian style fund would worsen the Scottish deficit.
"The Office for Budget Responsibility's (OBR) latest figures imply that the UK would be in a better position to ease austerity," it added.
Prof. McLaren said: "It seems inevitable that future North Sea tax revenues will remain difficult to predict.
"Not only do oil prices remain highly erratic and unpredictable, but production from the North Sea also appears to be getting more erratic and difficult to predict."
He added: "Current projections for Scotland's share of North Sea taxes seem likely to leave Scotland with a marginally better, or very similar, fiscal balance compared to the UK, but only up to 2014-15.
"Thereafter, Scotland's fiscal balance is set to worsen. This position could, in the short-run at least, further worsen if a Sovereign Oil Fund was initiated in order to improve budget stability."
However Professor Alex Kemp has challenged claims that his own forecasts are broadly in line with those used by the CPPR.
Speaking to Newsnet Scotland, Professor Kemp said: "The OBR's combination of low production estimates with low price estimates is pessimistic compared with other predictions including our own."
The leading academic, who previously worked for Shell, explained that the OBR figures on which the CPPR report was based were pessimistic in terms of both production levels and oil prices, and therefore represented the bottom level of current estimates.
According to Professor Kemp the OBR figures appeared to have been taken from two different sources, each of which provided the lowest available estimates for production and price respectively.
He said the OBR took their production estimates from the Department of Energy and Climate Change (DECC), who used a very high contingency for production shutdown, leading to an unusually low estimate of future production.
In its October projections for oil and gas production, the DECC report admitted to applying “very significant negative contingencies to the aggregate figures.”
However, explained professor Kemp, the OBR estimates of future prices, were not based on the DECC report but on the future contracts market, resulting in a low price of $89 per barrel. The DECC estimates of future oil prices are much more bullish, with 2017 prices predicted to reach $120.
The CPPR report has been seized on by Unionist opponents of independence. Head of the anti-independence Better Together campaign, Alistair Darling said: "This report endorses the work of the independent OBR.
"It shows just how volatile the oil and gas market can be and how difficult it is to make any kind of long-term predictions in this area.
"The Nationalists would have you believe that everything in a separate Scotland could be paid for by establishing an oil fund.
"What this report shows is that they would be looking to set up this fund at exactly the same time that the revenues from oil and gas would start to steeply drop.
"This would leave Scotland with a large deficit and would mean that some very hard choices would have to be made on public spending and public services."
However the comments from Professor Kemp will cast doubt on the validity of the conclusions drawn by the CPPR.
The report has also received significant coverage from BBC Scotland, with the corporation claiming that “oil revenues have contributed up to a fifth of Scotland's annual income (21.3%) in the past decade.”
In fact the 21.3% figure was from a single year 2008/9, while the lowest was 9.7% in 2003/4.
Responding to the CPPR claims, a Scottish government spokesman said: "With 24 billion barrels of oil still to be recovered with a wholesale value of £1.5 trillion, the North Sea oil and gas sector has a bright future, underlined just this week with Dana Petroleum's announcement of a £1bn development, demonstrating the continuing growth of Scotland's energy sector.
"Professor Kemp's latest analysis shows the Treasury will have taken £10 billion from Scotland's North Sea in 2011-12 at a time when Scotland is facing the prospect of up to five more years of UK austerity
"The CPPR acknowledge the OBR's forecasts, which are pessimistic relative to many others, should not be seen as the definitive picture, with the UK government's own energy department expecting oil prices of $120 in 2017.
"An independent Scotland will be able to face the difficult financial choices ahead from a stronger position than in the UK and use the full range of economic levers to support growth, boost revenues and deliver public services."
The OBR was created by Conservative Chancellor George Osborne after his party formed a coalition with the Lib Dems following the 2010 general election. The credibility of OBR figures were dealt a blow this month after the UK economy was revealed to have shrunk by 0.1%, despite the OBR having forecast growth of 2.5% in December 2011.
This is not the first time there have been questions over figures used by the CPPR. In September 2011 the think-tank was embroiled in a row after it was accused of triple-accounting after publishing a report claiming that Scottish government plans would see a massive hike in business rates.
The report, by Professor Jo Armstrong and Professor John McLaren, claimed that businesses in Scotland faced a massive increase to their business rates of £849 million over three years.
However in a letter to the Herald newspaper Finance Secretary John Swinney called the figure of £849m “misleading” and went on to explain that the real figure was £493m. Around half of which was due to the annual poundage rate RPI increases that are introduced north and south of the border and which businesses know they have to plan for.
The actual increase as a consequence of inflation was £250m over the three-year cycle and not the treble plus figure implied in the CPPR report