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The Energy Prices at Risk with Scottish Independence

Commodities / Energy Resources Sep 17, 2014 - 12:38 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: This isn’t the first time the devolution movement has threatened to break up the United Kingdom.

Scotland and Wales were considering their independence when I was living in London and lecturing at the London School of Economics almost forty years ago.


These days it seems like “déjà vu all over again.”

On Thursday, there will be a vote in Scotland to decide whether it will separate from the rest of the UK, and the latest polls are too close to call.

On the previous occasions, London always provided some concessions and the moves to break away failed. This time, however, the drive for an independent Scotland is better organized, led, and financed.

Either way, the latest vote appears to be a tight one.

For the government, Scottish independence would be a direct rejection of Prime Minister David Cameron. Yet on the other side of the aisle, the Labour Party would lose a significant number of Scottish seats in the UK Parliament, reducing its chances of unseating the Conservative-Liberal coalition anytime soon.

And there are numerous implications for the energy sector throughout if the vote succeeds…

The Prospect of Higher Energy Prices

Of course, the frustrations leading up to this moment have been building for some time. In fact, it began in earnest with the major oil and gas finds off the coast in the North Sea.

Scotland has benefitted from North Sea oil and gas, turning declining cities like Aberdeen into world-leading centers for offshore technology and services. Yet, the north has long argued that London benefitted more from the offshore flow than Scotland did.

To some, the huge gains in oil revenue just bailed out a struggling central budget at the expense of renovating the local Scottish economy. But on the other side, as “unionists” point out, Scotland has also received stipends covering about 90% of the electricity generated from renewable sources, especially wind power.

This has significantly offset the actual costs of energy in wide areas of Scotland where the effective unemployment rate remains the highest in the UK. When I was in Dundee last year, the employment rate was a staggering 63% and the situation has deteriorated since then.

The lag in economic development in most sectors, other than oil and gas, has been an increasingly strong point for separation. As a consequence, the Scottish National Party (SNP) has experienced a windfall of support

However, the vote has caused concerns among Scottish consumers. According to UK government reports, average yearly energy bills for Scots will go up by £189 (over $306 at current exchange rates) if independence occurs. That’s because bill payers in the rest of the UK effectively subsidize the cost of investing in renewable energy in Scotland.

Yet Scots themselves are hardly alone in their energy concerns as the vote approaches.

English households to the south are worried that consumer bills will rise if the SNP succeeds, since the UK as a whole would be stripped of Scotland’s oil reserves and wind energy.

The truth is nobody really knows how much the average household on either side of the border would pay. On the other hand, there are few who believe either Scots or English consumers will see their bills reduced.

All of this has brought more attention to the wind power subsidies. Scotland has substantial wind power already in place (both inland and offshore), but that electricity is still expensive to produce and requires government support to make it affordable to the market.

Independence would require that Edinburgh (the capital of Scotland now and certainly after separation) pick up a bill currently covered by the UK budget. Just about everybody has concluded this will take place through either higher energy bills, higher taxes, or both. Proponents and opponents of independence differ markedly on how much the bill and/or tax hikes would be, but not on whether they will be coming.

A separate scenario has emerged in which Scotland could actually make some revenue from selling its wind-generated power to England and Wales. Edinburgh would still need to develop the wind network and pay for its operations.

Here is where the European Union comes in. The EU now mandates that 15% of energy is to come from renewable sources. Whether a newly independent Scotland would petition to become an EU member is one thing. That it would allow the UK to meet its obligations is another. This has prompted some analysts to believe the two independent countries would have to end up sharing the costs of Scottish wind production.

But the EU is hardly static on such matters. Commentators have pointed out that Brussels could well mandate a higher percentage for Scotland, given its greater capacity for wind power and the virtual certainty that it would possess a surplus. The EU already does that with Sweden and its hydropower targets.

Even the ability to sell wind-generated electricity south is not automatically beneficial. Economists have noted that during warmer months of the year Scotland would be forced to sell electricity to England at a steep discount, losing money in the process.

Meanwhile, the concerns in the south seem clearer. Losing control over North Sea production almost certainly will increase prices for energy in England and Wales. Those in Scotland opposed to independence, therefore, still believe London will sweeten the pot with concessions in other areas to avoid a split.

The Big Risk in the “Independent World”

The big unknown is what will happen to gasoline and other oil product prices. The UK still relies on Scottish access to the North Sea but would no longer administer it. Quid pro quo price adjustments might add to the uncertainties in an “independent world.”

And it is here where a greater impact may be felt by the UK as a result. Oil and oil products sold internationally are denominated in US dollars. Even domestic sales of gasoline, diesel, and heating fuel are impacted by the “dollar effect,” regardless of the currency in which a retail sale is actually made.

As speculation increases over the Scottish vote, the Great British pound sterling has fallen to its lowest level against the dollar in almost a year. Now the overwhelming assumption points to an even steeper drop if Scotland goes its own way.

Two things will happen if this occurs. First, it will cost more for individuals and businesses to acquire fuel throughout the UK and in a new independent Scotland. Second, it will affect the price of the Brent crude benchmark price set each day in London.

Brent is now the dominant benchmark rate against which daily oil trades are priced worldwide. It is also denominated in dollars. But as the price is set in London, based on the price of a basket of North Sea production, the new uncertainty factor will place even greater pressure on the currency values underpinning that price.

This latter consideration will have an immediate impact on oil pricing volatility in many global regions well distanced from London or Edinburgh.

Meanwhile, other consumer considerations are also being debated. Providers of cell phone, postal, and Internet services have not commented (officially, at least) on whether the cost of communication services would increase between what would be separate countries in the wake of independence.

For instance, would calling Glasgow from just across the border now incur roaming costs?

This is not simply an example of fear mongering by those opposed to independence. In this case there is a precedent. The UK’s three biggest mobile providers – EE, O2, and Vodafone – offer services in Northern Ireland (a part of the UK) and the Republic of Ireland (and independent country), but charge their respective customers for roaming on either side of the border.

Every time I am in the UK my cell phone bill goes through the roof anyway. And now I may also feel a pinch in the wallet from going online as well.

Mel Gibson may be famous for yelling “Freedom” at the end of Braveheart. But if Scotland takes the same course, it will have another effect.

It is going to cost me more money!

Source : http://oilandenergyinvestor.com/2014/09/the-energy-prices-at-risk-with-scottish-independence/

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