UK Pound Sterling and Scottish independence

Readers Question: Hi, just been watching tv about independence and the Scottish leader says our balance of payments would double if there was no oil money and they had their own money. What would happen to the English pound? would it go down?

In 2012, the UK exported £39.6 bn worth of oil. In 2012, the UK current account balance was -£36 bn. See more at UK Current account 

If all oil exports stopped (transferred from UK to Scotland), then, ceteris paribus, we would see a bigger current account deficit and some depreciation in the Pound. However, we might not really notice either actually occurring because so many other factors affect the current account and the value of Sterling.

Balance of Trade in Oil in UK

£ million

Exports Imports oil
2010 -4 719
31 329
36 048
2011 -11 511 38 039 49 550
2012 -14 160 39 684 53 844

In recent years, the UK has had a growing deficit on trade in oil. We are becoming a net importer of oil.

 Total Trade UK

£ million

 Exports  Imports  Balance
2010 447 885 479 387 -31 502
2011 493 006 516 597 -23 591
2012 488 175 524 233 36 058

Source: UK Trade February 2013

What would happen to UK current account deficit, if Scotland became independent?

Assuming all the oil would be now exported by Scotland, then you would expect a bigger current account deficit in the rest of the UK (England and Wales). However, I doubt the UK current account deficit would double.

  • The Continental Shelf Act 1964 suggests 90% of UK oil falls under Scottish jurisdiction.
  • Oil only accounts for 8% of total UK exports. Therefore, the impact on the current account depends on the other components of the balance of payments. It is likely that the smaller UK would see a fall in oil exports, but the overall effect depends on other exports and imports. It may be Scotland has a bigger current account deficit on manufacturing and food. Therefore, this would offset the increase in oil exports. However, I don’t know if anyone has broken down the UK current account into Scotland / England.
  • Also, if oil exports fell, the Pound would depreciate and this would make the rest of England’s exports more competitive, offsetting the rise in the current account deficit.

What would happen to the Pound if Oil exports fell?

  • If oil exports were now included in Scottish accounts, and other components of the current account were neutral, then you would expect the Pound Sterling to fall.
  • A fall in oil exports and increase in the current account deficit would mean there is less foreign demand to buy Pound Sterling. Therefore, the Pound would tend to depreciate. (this depreciation would reduce the smaller UK’s current account deficit)

However, the impact might not be too great. There are many factors affecting the value of the Pound apart from oil exports.

There are also other factors to consider, for example, relative productivity and import spending within Scotland and England.


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