Can Oil Fund an Independent Scotland Post-Brexit?

Last week, British voters shocked the world by voting to leave the European Union after 43 years. But Scotland, one of the four countries that make up the United Kingdom, voted overwhelmingly in favor of remaining in the EU by a margin of 62 to 38 percent. As a result of Brexit, Minister of Scotland Nicola Sturgeon says a new Scottish independence vote is “highly likely.”

One of the arguments made by pro-independence activists since the 1970s has been that oil production in the North Sea would allow an independent Scotland to be economically viable in the model of its North Sea neighbor Norway. Cries of “It’s Scotland’s oil” are bound to be heard again if Sturgeon and the Scottish National Party follow through on their push for a new referendum, but unlike 2014, the argument to turn Scotland into a rentier state looks significantly less appealing.

First, how much oil does Scotland exactly have? The Scottish government estimates the UK Continental Shelf off the coast of northern Scotland has the equivalent of 24 billion barrels of oil and gas reserves, though other Scottish energy experts warn that the amount is more likely closer to 15 billion barrels. This is enough for 30-40 more years of energy production at current rates divided roughly 55-45 between oil and gas production.

But both oil and gas production off the Scottish coast have been steadily declining since 2000 at an average annual rate of 8 percent according to the EIA and investments in new reserves have been lagging, making it unlikely Scottish energy production will rebound any time soon.

How much money is Scotland’s energy worth to the economy? In the year leading up to the first Scottish independence vote, North Sea energy production contributed $27 billion to the Scottish economy – roughly 12.5% of the country’s GDP – according to estimates by the Scottish government. For comparison’s sake, oil and gas rents accounted for 15.7% and 14.5% of the Russian and Nigerian economies respectively in the same period.

But that was 2013, when oil prices were hovering around $110 per barrel. Since June 2014, three months before the first independence referendum, oil prices have plummeted, bottoming out at $28 per barrel this January before rebounding to around $50 today. In its pre-referendum analysis, the Scottish government projected tax revenue from oil production would be £7.5 billion for 2015, worth roughly $11.5 billion at the time, a number that was extremely optimistic even before the oil price collapse given production declines. The actual tax receipts at the end of last year ended up at just £130 million, worth roughly $195 million, an amount that would cover just 0.4% of the Scottish government’s £28 billion budget.

The continued low price of oil and the collapse of the British pound following the EU referendum give Scotland few good options for making up this budget gap with energy. Though in the short term a weaker pound sterling makes their domestic expenses cheaper relative to the global price of oil, in the long run it also makes it more expensive for Scotland to invest in future energy production in order to stave off continued production declines.

The United Kingdom’s decision to leave the European Union removes one of the most important arguments against Scottish independence, but the reality of the global oil market and declining domestic production also remove one of the most important arguments in favor of independence. Scotland may ultimately decide that the benefits of staying in the EU are worth the costs of leaving the UK, but it will need more than just its energy assets to justify it economically.