A FUNNY thing happened on the way to the second indyref – oil prices soared in the wake of Covid and the Russian invasion of Ukraine. Suddenly, all the mocking references to Scotland’s supposed budget deficit have disappeared.

Instead, Scotland has re-emerged as a major player in the global energy stakes. Just don’t say it too loudly or the whingeing Jocks will start to realise how they can escape the cost of living crisis by simply running their own energy industry.

Let’s start with a look at oil and gas prices – the two are linked. North Sea Brent crude was running at $119 a barrel last week while US petroleum was at $115. That’s the highest since oil prices crashed in late 2014 in the aftermath of the banking crisis and global economic downturn. But there was also an excess of oil and gas capacity, resulting from the previous decade’s energy industry investment. Even without Ukraine, anyone with eyes to see should have realised that eventually oil demand would catch up with supply again, as it always does. It has with a vengeance.

The wild card this time round is the battle against climate change and what this means for cutting energy demand. Unfortunately, attempts to curb fossil fuel use have been chaotic and unplanned.

For instance, the first major cuts in hydrocarbon use focused on coal, the single biggest source of emissions. However, coal is very cheap. Cuts in coal use in 2019 and 2020 only added to the surge in demand for gas, because there were insufficient renewables to take up the slack. As gas prices skyrocketed after Covid, electricity producers began using more cheap coal. Result: demand could hit an all-time high this year.

Paradoxically, because global warming has caused major flooding and power outages in China, Beijing is actually burning more coal to cope with disruptions to the grid.

Despite the return of coal, oil demand is rising too. The International Energy Agency (IEA) predicts oil demand will rise by 1.8 million barrels per day (mbpd) to 99.4 mbpd for 2022. After that, everything depends on whether countries honour their commitments to achieving net-zero emissions by circa 2050.

However, since COP26 in Glasgow, the energy price rise has triggered a cost of living crisis around the globe. On top of this, the world’s population will increase by more than two billion between now and mid-century, vastly adding to energy demand. Conclusion: fossil fuel usage is not going to moderate any time soon.

The big economies have promised collective cuts in fossil fuel use by 2030 that would keep oil demand fixed at more or less where it is today. But that is a long way off net zero. More likely, on current practice, oil demand could go to 105 mbpd by 2030, according to the IEA.

The IEA’s projection for gas demand shows an even steeper rise. That suggests no fall in fossil fuel prices – certainly not over the next decade, should Scotland attain independence. This represents a major shift in the financial scenarios after Scottish self-determination.

What does this mean in cash terms? In 2016-17, net oil and gas tax revenues garnered by the UK Treasury were actually zero. This was not a reflection of falling output so much as the vagaries of a fiscal regime that allows profit-guzzling oil monopolies to claim absurd tax rebates. I hope an indy Scotland is never so accommodating.

However, with the current rise in oil and gas prices – even with the absurdly lax UK tax regime – the Treasury should rake in £8 billion from the North Sea in 2022-3, according to the independent Office for Budget Responsibility. That’s £5.3bn more than the OBR predicted last October. And it is based on a lower oil price that has since emerged.

Nor does it include Chancellor Rishi Sunak’s new windfall levy. That move should add another £5bn per annum to the Treasury’s coffers. Which makes for £13bn per annum if demand stays high – which it will.

Back in 2008, at the time of the banking collapse, oil and gas tax revenues were running at around £10bn per annum. This prognosis, on OBR figures, represents a considerable gain for the Treasury and represents circa 2.5% of UK tax income. Just imagine most of that going to a Scottish Treasury.

I’ll add a caveat here. The OBR is less sanguine about future oil revenues than others. In March, when the OBR did its calculations, the futures markets for oil and gas were predicting a sharp fall in oil prices after 2023. So the OBR thinks revenues will slide back after mid-decade. However, this methodology is wonky. For starters, it does not take into account the impact of the Ukraine crisis long-term. Secondly, the future market in liquid natural gas prices has gone insane. And where LNG futures go, oil will surely follow. Thirdly, the Saudis and Opec are showing no sign of pumping more oil – why should they when the West keeps telling them it wants to end oil use completely by 2050?

Which leaves us with the prospect that indy Scotland could receive circa £10bn per annum in oil and gas revenues, at least for the decade. If you believe Scotland has a notional budget deficit of around £13bn (the “normal” pre-Covid figure presented in the GERS accounts) then the rise in oil and gas prices effectively removes the theoretical shortfall.

With strong oil revenues, the notional deficit (which I contest exists) falls to around 1.6% of GDP. That would be more than acceptable to the financial markets. We could even afford a bit more borrowing to take the deficit to the EU’s 3% limit.

Of course, there is the aftermath of Covid which, again in notional terms, increased Scotland’s so-called deficit to 21% of GDP. However, the rise in the UK deficit from Covid was funded by the Treasury effectively printing money. So Scotland’s allotted Covid debt in GERS is an accounting fiction.

Secondly, Chancellor Sunak and the Bank of England are stoking inflation at a rate that is cutting the real value of the national debt by 10% per annum. Finally, in negotiations over independence, we don’t need accept the Treasury numbers or spending priorities. Scotland’s annual fiscal footprint will be very different from that of an English, Tory government.

Currently, the SNP are proposing using any North Sea tax revenues to kickstart an oil fund on the Norwegian model, rather than use the money to fund immediate expenditures. Personally, I have always been in favour of using the revenues from a wasting resource like oil to invest in long-term assets. But, equally, the rise in oil revenues will provide a cushion in any fiscal transition, post-independence.

That leaves the vexed question of whether or not to extract the maximum production from the North Sea before attempting net-zero emissions. Surely the answer is to use existing fuel resources in a planned fashion, in order to manage the transition while blocking any precipitous rise in the cost of living for ordinary Scots.

Why else seek independent control over our own energy resources if we are not prepared to exploit them for the common good?