Bad Timing for Scottish Independence

Scotland under First Minister Alex Salmond announced plans to hold a referendum on independence from the United Kingdom in 2014. Edinburgh maintains it can support itself without the help of London, largely through its oil and natural gas fields in the North Sea. Scottish finance officials said there are trillions of dollars worth of oil reserves left in the North Sea yet an economic assessment found that Edinburgh would take its first step as an independent nation while shouldering massive debt.

The discovery of oil off the coast of Scotland in the North Sea in the 1970s breathed new life into a campaign for independence that dates back to the mid-19th century. Scottish Finance Secretary John Swinney said North Sea oil could generate as much as $1.6 trillion in revenue for an independent Scotland. Yet, a report from the British National Institute of Economic and Social Research suggested that Scotland would enter independence "heavily indebted" with "no insurance from fiscal risk." Would the reserve capacity in the North Sea give Edinburgh enough cash to shield it from similar debt burdens plaguing the eurozone? With the recent rush back to the North Sea, that remains to be seen.

Swinney said his country "punches above its weight" in terms of international investment. Last year, Scottish officials courted Arab leaders in a bid to attract major investors to the region and Swinney said an independent Scotland "can support herself" just fine, though the NIESR begs to differ.

"Even with a favorable settlement on future oil revenues, its fiscal balances are likely to be volatile with large deficits in some years as a result of its dependence on oil revenues," writes Angus Armstrong, director of macroeconomic research at NIESR. He said an independent Scotland's debt would be about 70 percent of the country's gross domestic product.

Pro-independence groups suggest Scottish oil is generating about $50 million a day and it's this money that's keeping the U.K.'s economy alive. Swinney said Edinburgh has a "tremendous assets base" and even went so far as describe Aberdeen as the "oil and gas capital of Europe."

Salmond's referendum on independence would go before Scottish voters in the fall of 2014. Salmond's Scottish National Party argued in the 1970s that North Sea oil wasn't doing Edinburgh any good while it remained a part of the larger United Kingdom. U.S economic data suggests things are looking up for 2012, though similar forecasts during the first quarter of 2011 proved way way way too optimistic when the credit rating agency Standard & Poor's later downgraded the U.S. credit rating for the first time ever. Yes, international majors and regional governments are trumpeting the resource potential in the North Sea and yes that means good things for the regional economy. But the broader eurozone is in trouble. If Salmond's SNP can wait 40 years, it may want to wait just a few more if only to shield the broader regional economy from further calamity.

By. Daniel J. Graeber of Oilprice.com