Economy Q&A: Is Scotland still too dependent on oil and gas?

Written by Staff reporter on 24 January 2018 in Inside Politics

Holyrood asked five economists for their views about key questions on the Scottish economy

Professor Charles Nolan, Professor Julia Darby, Professor Ronald MacDonald, Professor Jeremy Peat, Professor Catia Montagna - Image credit: Holyrood

Is Scotland still too dependent on oil and gas?

Professor Julia Darby, Head of Department of Economics and Fraser of Allander Institute, Strathclyde Business School:

It is wrong to say that Scotland has ever been too dependent upon oil and gas. It was – and still is – an important sector of the Scottish economy which has helped support jobs and investment for decades. The challenge is how we can help the sector transition to operating on a smaller scale and to diversify into new areas. 

Professor Jeremy Peat, Visiting Professor, University of Strathclyde International Public Policy Institute:

Scotland inevitably became disproportionately dependent upon this sector because of our resource endowment – we had the reserves. For several decades this was good news. Also we took advantage of this resource to build a strong domestic sector exploiting the resource, and adding value within our economy. We also saw some businesses grow by exporting – exploiting the skills and technologies developed domestically in overseas oil and gas sectors.

The next step in the evolution of this part of our economy, already underway, is to use these same skills and technologies across other sectors, not just other economies. Over time our dependence upon oil and gas will inevitably decline, not least as carbon fuels become of decreasing importance within the energy sector, as measures are implemented to control climate change and global warming.

The challenge for those Scottish businesses (manufacturers and service sector companies) which have emerged from oil and gas will be to continue to diversify across countries and sectors. Oil and gas gave us a great advantage and the benefits of that advantage can still be reaped in the years ahead. Continuing investment, innovation and the flexible use of skills will again be critical.

Professor Catia Montagna, Chair in Economics, University of Aberdeen:

The oil and gas sectors and their wider supply chain account for a significant share of the Scottish economy.  

Overreliance on any one sector can be risky, and more so in markets such as these where instability is driven by geo-political as much as economic or technological factors. It is therefore important, as a recent Oil and Gas survey suggests, that firms in the sector are now considering a shift towards renewable energy technologies. 

Scotland has a fairly diversified sectoral composition, but there is a high dominance of micro-businesses (in fact, a large share of the new firms created in recent years have no employees). This is a problem: there is a clear correlation between an industry internationalisation and its size and productivity distribution of firms. Countries such as Germany and Japan have a more diversified production and export base but, crucially, their average firm size is also larger.

There also needs to be a rethink of the traditional emphasis of industrial policy on sectors. Industrial competitiveness now reflects participation in complex international production networks and is no longer confined within industries (or even firms); the distinction between manufacturing and services is also increasingly nuanced. A horizontal policy of encouraging the development of factors of production (for instance, subsidisation of technical education) may be more effective in supporting diversification than incentives targeted to particular sectors.

Professor Ronald MacDonald, Research Professor of Macroeconomics and International Finance, University of Glasgow:

Yes, see my previous answer on infrastructure.

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