Mairi Spowage: Energy must be directed to a successful transition

The future of the North Sea oil and gas industry has featured heavily over the course of the election campaign, particularly here in Scotland.

This is partly due to the seats that different parties are contesting, given the concentration of these roles in the north east of Scotland. 

The oil and gas industry has, for many years, been described as “declining”, from the heights of production in the eighties. The focus on the decarbonisation of our economy over the past 10 years saw this decline go hand in hand with what we needed to do to move our economy to net zero (in legislation by 2050 in the UK and 2045 in Scotland).

Energy security concerns since Russia’s invasion of Ukraine have complicated the conversation somewhat, with more focus on access to domestic supplies without over-reliance on imported energy. 

So how important is oil and gas to Scotland’s economy?

There has been a significant decline in the production output and therefore the economic output of the oil and gas extraction industry since the 1980s. The mining and quarrying sector has fallen from around 7% of the UK economy in the mid-1980s to less than 1% in 2023. However, it remained around 10% of the Scottish economy in 2023. 

The slice of the economy taken up by this activity averaged around 13% between 1999 and 2014, before falling to 6% following the oil price crash in 2015. This has crept back up to 10% in the latest statistics. 

This represents £21 billion of gross value added to the economy in 2023 and contributed around £3,000 to our GDP per person in Scotland. 

Putting that in the context of other sectors of the economy, all manufacturing makes up 10% of the economy, the construction sector is 5% of the economy, wholesale and retail makes up 9%, while financial and insurance activities represent 8% of the economy. 

More often, we think of these sectors in terms of jobs they support in Scotland. 

UK-wide, Offshore Energies UK estimates there are 26,000 jobs directly supported in the oil and gas industry across the UK (the vast majority of which, around 23,000, are in Scotland). 

These are significant numbers, of course, but one of the most striking things about this industry is the so-called multiplier effects it generates. That is the number of jobs generated in supply chains for every job that exists in the oil and gas extraction sector. 

Aberdeen

This multiplier is very high for oil and gas, with three to four jobs in the supply chain being generated for every job in the sector. While not all these jobs are in Scotland, we estimate around 40% of these are likely to stay in the domestic Scottish economy. 

This is why, when there was a downturn in the oil and gas sector in 2015, it meant there was a significant downturn in the Scottish economy overall. This shock affected the Scottish economy much more acutely than the UK economy, and opened up a significant gap in economic performance in 2015 and 2016. 

These jobs are in a number of sectors – our engineering services, water transport services, fabricated metal manufacturing and so on. 

This is before we think of the so-called “induced” jobs, those that are supported by wage spending of oil and gas workers and supply chain workers, which are also estimated to support tens of thousands of jobs. 

Of course, jobs supported by a sector may not necessarily diminish or disappear if a sector disappears – the economy is dynamic, not static, and labour is likely to be reallocated to an extent to emerging and strengthening sectors.

The crucial thing for the north east of Scotland, however, is that many of these jobs are concentrated in a specific geographic area.

While induced jobs, in particular, may be supported by wage spending of other workers as the economy adapts, a look at the impacts seen on hotels and retail in Aberdeen since the oil price shock of 2015 suggests large reductions in oil and gas jobs could have a significant induced effect on other sectors in the region.

So, this is a very important sector, for economic activity and for jobs in Scotland, and in particularly for the north east of Scotland. 

It still makes up a large chunk of our GDP, and its very large multiplier effects mean it still significantly impacts other sectors in the UK economy. 

Given the industry’s importance, it is understandable it has been a focus in the campaign, including differing views on whether new licences will be issued for new oil and gas sites. 

However, the focus should be a debate over the speed of the transition from oil and gas to other forms of energy, and how this can be done in a way that protects existing skills and supply chains that can be repurposed into new technologies.

Crucially, how can we grasp the opportunities that new technologies provide to develop new supply chains in areas where Scotland has strengths? 

The energy transition does have to happen, oil and gas will decline, and policymakers must look to see how investment can be unlocked in these new technologies to ensure the transition happens in a way that protects workers and communities.

As we saw this issue being used over the past few weeks as a political football in the election campaign, it is important not to make it about whether one is for or against the workers of the north east of Scotland – no one is against them, and everyone wants the economy to succeed.

The more important policy question is how different layers of government can work together to unlock investment in the transition as quickly as possible: whether that is about investment in grid connections, investment in skills, or issues with the planning system.

The next UK Government, whatever its composition, will have to make significant progress on this in the crucial next few years up to our interim targets in 2030. 

The Fraser of Allander Institute produces a quarterly economic commentary – see the latest edition at fraserofallander.org/research/fai-economic-commentary