Scottish independence: Two oil and gas challenges facing Yes supporters since 2014

The conversation about decarbonising our economy will touch every part of our lives, from how we heat our homes, power our vehicles, and even how we produce food. In Scotland, it also signals a structural change in our economy. Economic activity and jobs related to the North Sea have formed an important part of our economy since the 1970s.

Even now, the North Sea oil and gas extraction sector is still a significant contributor to Scotland’s economy. In the latest year of data (2020), offshore extraction activity alone made up 5 per cent of the Scottish economy, with a further 1% onshore directly generated through mining support services.

This is just the direct impact, of course. Oil and gas extraction also supports substantial activity in many supply chains, particularly in fabricated metal, construction, engineering, and professional services. Industries that lie downstream to extraction activity have also featured heavily in Scotland’s recent economic history, most notably demonstrated by the Grangemouth complex.

Smaller, proportionately, is the scale of jobs supported by the sector. The latest data directly links around 28,000 employees to extraction activity and mining support services in Scotland, the vast majority of which are employees rather than self-employed workers. These jobs are both in the offshore sector and the explicit sectors which support mining activity. There are, of course, many further jobs in the supply chain which support industries in the economy – within manufacturing and engineering particularly.

Since its inception, one of the key features of this industry has been its adaptation to continual change in both global and national economic conditions. Both jobs and Gross Value Added (GVA) have declined significantly since the heyday of the sector in the 80s, but they both are still sizeable. For example, the GVA of extraction activity plus onshore mining support is comparable to that of the construction industry in Scotland.

The often much higher wages associated with these jobs also amplifies their importance to the economy. In recent years, median wages in the sector have been at least 30% higher than median wages in the economy.

James Black

The transition to decarbonise our economy therefore represents a critical structural change to the Scottish economy. The impact that this could have on the outlook for participation and earnings in Scotland has been made clear in the most recent forecasts for the economy produced by the Scottish Fiscal Commission, who have cited it as a reason for worsening their forecasts. These forecasts have a real-world effect on the resources available to the Scottish Government due to the impact on the outlook for income tax receipts.

The impacts of this structural change in our economy will not be felt evenly across Scotland. Of the jobs discussed above, the vast majority of employees are based in Aberdeen City itself, with another significant chunk in Aberdeenshire. Throughout the pandemic, it is clear that these areas have been particularly hard hit in terms of payroll employment and wage levels, no doubt linked to the impact on the oil and gas industry.

And this is just one of many trade-offs that exists between maintaining Scotland’s current economic structure and its net-zero ambitions. These trade-offs cannot be ignored, nor can the transition. And the transition is not solely a landscape of difficult decisions.

Opportunities do exist that can help minimise these trade-offs while helping Scotland combat climate change. Grasping these opportunities is vital, at the very least because of relatively lower resistance to this change.

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One such opportunity can be found in renewable technologies. Seizing Scotland’s full economic potential of renewable technologies can create new industries, bring growth to rural areas, and generate sustainable employment.

But change, innovation, and adaptation will be needed across the economy. And let’s not be too blinkered about this. The opportunities will come not just in the energy generation sector. If we can capitalise on the supply chain opportunities, expanding offshore capacity will generate jobs in manufacturing, professional, and support services.

However, there are also opportunities in how this energy is provided to our homes, businesses and transport network. New jobs will be created, and existing jobs will have to adapt to help provide these new goods and services, which are likely to appear in all sectors of our economy.

Government support for developing these jobs will be critical where there is a role for the public sector to incentivise investment. And crucially, provide support to build the framework for the investment in skills that these new or changed occupations require.

What does this mean for the constitutional debate in Scotland?

The role of oil and gas represents a clear difference between the debate in the run-up to the 2014 referendum and the economic battlegrounds in any future debate about Scottish independence.

In 2014, the oil and gas sector’s future – particularly the revenue generated by the sector’s operation – was a key part of the economic case made for independence and was a central part of the fiscal sustainability of an independent Scotland.

In 2022, the argument is very different for two reasons. The first is that oil and gas revenues have fallen significantly, and it is broadly acknowledged that they are likely to remain less significant than in the past.

The second and more important reason is that oil and gas extraction simply cannot be part of our long-term economic future given our climate-change commitments.

This transition is required whatever path Scotland chooses to take. Those who are setting out different visions of Scotland’s future will need to set out the pathway for this transition for Scotland – not forgetting about the livelihoods and jobs that rely on Scotland’s current economic structure.

James Black is a Knowledge Exchange Fellow at the Fraser of Allander Institute at the University of Strathclyde