As a separate country, Scotland will be a classic small, open, resource-dependent country
Natural resources and especially energy play a crucial role in Scotland’s economy. A key element in the case for independence is that constitutional change will offer more control over the way in which Scotland’s resources are exploited and, thus, ensure that a higher proportion of the resource rents accrue to those living in Scotland. That argument is valid but it is a double-edged sword. The benefits of obtaining a greater share of resource rents must be weighed against a sharp increase in the risks of being exposed to the macro and micro effects of reliance upon a notoriously volatile sector.
This paper highlights some of the potential consequences of such exposure. These problems can be and have been dealt with, but this will require a combination of economic discipline and an acceptance of economic volatility that may be uncomfortable for a population that has been substantially insulated from such risks up to now. The arguments made by the Scottish Government tend to put more weight on the benefits of the change, relying upon optimistic and convenient assumptions about market arrangements and performance after independence. It is easy to react to such presentations by emphasising the potential disadvantages of separation. That is equally misleading. Scotland’s energy sector can and will adapt to independence, but the process will not be simple and the costs may include an acceptance of much higher levels of risk – and, thus, higher rates of return on capital – than in the past.
2014, Oxford Review of Economic Policy