The Falling Price of Oil

The recent significant fall in world oil prices raises several issues and questions.

One crucial issue is whether the low price will be sustained. If not, through, for example Saudia Arabia cutting back on production, then any effect on economic activity will be short lived. But it is now clear that Saudia Arabia has much less power to influence world oil prices than it used to have due to its diminishing share of world oil production.

Another crucial issue is whether economic agents e.g. Investors in energy expect the low oil price to sustain. One key factor here is the structural change that has occurred to world oil and gas supply due to the development of US shale. This development makes much less certain the view that the oil price will soon pick up as growth in the world economy recovers. Assuming then then that oil prices will remain low for some time because of the growth of supply relative to weak demand then we should expect something like the following consequences:

The U K economy should benefit: improved trade balance, lower input costs; both of which should boost growth in the UK.
Scotland will benefit from the UK boost to growth but as an oil exporting economy growth will slow directly as a result of the lower oil price: the demand for oil is price inelastic so the value of oil sales and hence Scottish incomes and domestic demand will fall directly on that account. Exploration may also be deterred so investment offshore and probably also in Scotland is likely to fall. It is difficult to assess what the net effect will be. What we can say is that Scotland's economic performance will deteriorate relative to the UK due to the oil price fall.
The renewables industry will be affected quite badly in the short to medium term: it will become less price competitive and hence there will be reduced demand for renewable energy and less investment in the industry. It will also deter investment in future renewable technologies such as wave power as the recent problems with Aquamarine probably affirm. Scotland will suffer disproportionately compared to UK because of the relatively greater importance of renewables to the Scottish economy.
The UK public finances will be affected. In the short run negatively as oil revenues fall but in the medium to longer term it is difficult to say due to the boost to growth and taxes paid to the Exchequer. My guess is a probable net benefit to UK tax revenues.
An independent Scotland would suffer badly if the low price was sustained: lower economic growth, lower tax revenues and a much worse structural fiscal deficit. It would bring the whole economics of independence into question. This indeed is the long - term consequence irrespective of what happens to the price of oil because of falling oil production volumes from the North Sea. It would make it more imperative for an independent Scotland to develop alternative sources of production and tax revenues. This would be difficult if Scotland is exposed to the international financial markets to fund its borrowing.
As part of the UK, Scotland is sheltered, even with the Smith Commission proposals, by the retention of the Barnett formula for non devolved spending. This should ease the adjustment of the Scottish economy to a future low oil price, low oil production volume state. However, the necessary adjustment will only occur if the Scottish Government and the private sector invests in developing and diversifying Scotland's export - and particularly manufacturing export - base.

(Posted from my mobile phone)