DRILLING FOR THEIR COUNTRY

If Scotland does vote for independence, it will need money to survive. The question is, how much - and canthe oilfields provide it?

AT DUNBEATH, a town on the Caithness coast once famous for its herring fishery, it rained for almost all of the summer. Yet one day in August, the sun came out for a moment and I saw, some distance out in the sea, a pair of oil-production platforms. The sight baffled me. Up to that moment I hadn't known that any oil rigs were visible from the shores of this kingdom.

Maybe it was the brief sun after so many weeks of rain, or the name of the oilfield, which I was told is Beatrice, but those oil platforms made substantial for me what was up to then just an abstraction: a set of numbers, really, of barrels of crude oil per day produced or millions of pounds earned. There seemed something about the rigs that was conclusively Scottish, along with the rain and the cliffs and the fulmars and the clouds of biting insects and the drizzle and that Highland emptiness (of people and property) which is both tragic and exhilarating.

I thought, not for the first time but with an urgency that I had never felt before: what if this oil became the property not of the United Kingdom but just of these Scots, like the herrings at the turn of the 19th century? Or, to put it another way, could the Scotland of the Scots Nats survive and prosper as an independent state?

The Scottish National Party says it will, if elected to power, hold a referendum on Scottish independence. The latest opinion polls report that, if next May's election were held now, the SNP would indeed be the largest single party at the palace of Holyrood, though a voting system based on proportional representation might still require it to govern in coalition. The same polls suggest that a referendum on independence could go either way.

We are in the hypothetical blue. Yet suppose the referendum is called and the Scots vote Yes to independence: it is hard to imagine the UK parliament opposing their will. The fiendish business of dismantling the United Kingdom will begin. As part of the necessary paraphernalia of independence, the SNP says Scotland will have its own money, as it did before the Union in 1707.

This pound Scots (or pund Scots) would not be expected to last long. Alex Salmond has become an enthusiast for European Monetary Union. According to Kevin Pringle, the party's spokesman, an SNP government in Scotland would seek popular approval for the absorption of the independent Scots currency into the euro. The events of late August and early September, when some currencies outside the euro bloc - notably, the Norwegian krone - came under attack from speculators, can only have increased the SNP's enthusiasm for the euro.

I had no telephone in Caithness. Later in Edinburgh and London, doing the rounds of banks and stockbrokers and politicians and academics, two points became clear. The first is that the Scots, as much as any race in Europe, are happy to think in economic categories; but if they choose independence, it will be not just or even primarily for reasons of their material well-being. Scottish attitudes to England and this continent are complex and passionate. The second is that the accuracy of the numbers given below is under intense political dispute. They are also static. They offer a picture of Scotland at a particular moment, but don't tell us how events might unfold.

Adam Smith would have viewed Scots independence with horror: the experience of the Forty-five rebellion was fresh and painful. But if he were alive today and could be reassured about Jacobitism, he would probably ask two questions. The first is whether five million Scots can shoulder the burdens of government in Scotland - defence, foreign policy, social security, health and education - that are now spread over 59 million Britons. The other is whether an independent Scotland with its own money and trade law would be as successful as a trading nation as the present northern part of the UK.

For the English, and many Scots, Scotland has long appeared a poor relation of England. Despite the prosperity brought by the Union in the 18th and 19th centuries, and again in the 1900s, wages and home-ownership are lower and unemployment higher in Scotland than in the UK as a whole, and public spending per head is higher, as we know from the novels of Irvine Welsh. "My generation," said Andrew Wilson, the economic theoretician of the SNP in Edinburgh, "was told all the time, 'You're too poor to achieve anything in the world, you're just a lot of subsidy junkies'." The unionist governments in Westminster, whether Tory or Labour, have tended to reinforce that picture.

In an annual Scottish Office publication called Government Expenditure and Revenue in Scotland, Tory and Labour governments collected statistics that might have been intended to tell the Scots they're all schemies. It analyses how much is spent by the central government in Scotland against what is raised in income and corporation taxes, stamp duties, excise duties on booze and fags, betting duty on bookies and the lottery, social security contributions, airport taxes, motor vehicle licence fees and insurance premium tax. Taxes paid by the oil companies on the Continental Shelf - this is important - are not counted.

In 1994-95 Scotland, which provided only 8.9 per cent of the central government's revenue, received 10.2 per cent of the government's spending. The next year, the percentages were 8.7 per cent and 10.1 per cent. On the basis of those sums, the Scottish Office worked out that an independent Scotland - without oil - would have run a deficit on its public accounts in 1994-95 equivalent to 14 per cent of its total output - GDP - and 12.5 per cent in 1995-96. The difference would have had to be borrowed in world financial markets, and that would have been either hard or impossible: even Greece, the worst-financed country in the European Union, had a deficit in 1995 of only 9 per cent. Economically, Scotland would be way out in eastern Europe or even central Asia. The euro would be a fantasy. Under the Maastricht Treaty of 1992, euro members are supposed to have deficits no larger than 3 per cent.

That is where oil comes in. The offshore oil industry pays taxes on its profits, like other companies, and also, for most of its fields, a special tax known as Petroleum Revenue Tax. In the early 1980s, when Britain was self-sufficient in oil and prices were high, those taxes were bringing in up to pounds 12bn a year and restoring the UK's fortunes. Revenues were estimated by the Inland Revenue at pounds 4bn last year, but the price of oil has since collapsed and revenues will be much less this year.

In justice and equity, an independent Scotland would have a right to those taxes. The question is: how much right? The stingiest offer would probably be in line with Scotland's share of the UK's population, about 9 per cent. On the other hand, extending the English-Scots border into the sea would give at least 90 per cent of the industry to an independent Scotland. The SNP says that the British government long ago recognised that 90 per cent of the offshore oil industry comes under Scots jurisdiction for the purpose of common law.

Had Scotland really been entitled to 90 per cent of the offshore tax revenues in the 1980s and 1990s, its position would have been quite different. According to a parliamentary answer extracted from the Treasury by Alex Salmond in January 1997, in that case Scotland would actually have remitted pounds 27bn more to London than it received. According to the Scottish Office, its fiscal deficits would have been just 9 per cent in 1994-95 and 7 per cent in 1995-96,which ain't so bad.

In the City of London in June, a well-known economist with the US investment firm Salomon Smith Barney, Michael Saunders, brought the story up to date. Because of the tremendous strength of the British and Scots economies up to mid-summer, tax revenues have been pouring into the UK treasury. Without oil, the theoretical Scots deficit fell in 1997-98 to 8 per cent of GDP. But once the tax revenues from oil are applied to Scotland, the figure falls to a mere 2.9 per cent which is, hey presto!, just inside the Maastricht cut-off for euro membership. Since then the price of oil has continued to fall, and the picture this year would be a little worse. The point is that an independent Scotland that could tax the oil industry at present levels would be one of the better financed states in the European Union. "If the Scots want independence and the euro," says Saunders, "a percentage point or two would do it. Remember, the Italians came from a much worse fiscal position."

Of course, that is just one year. And who knows whether the UK as a whole will permit the Scots to walk off with the offshore oil industry: after all, it wasn't Scots capital that put it there. (A peculiarity of the independence debate is the Scots' touching faith in English fairness and generosity.) The price of oil is tailing off, and it won't last for ever - any more than the herrings that built Dunbeath and the other towns on the Moray Firth, then swam away and left them to decay. The achievement of the SNP has been to question the long-held assumption that the Scots are dependent on London. "At the very least " said Andrew Wilson, "there is a great deal of dubiety about the government's claims."

The second question, about the economy of a hypothetically independent Scotland, is even harder to answer. Scotland went into the Union at the beginning of the 18th century because it could find no way into a cartelised world economy: and by the end of the century, the country was flying. One of the most entrenched ideas in politics is that a nation needs a critical mass of population, military power and capital to survive and prosper in the world. Like all regionalists, the SNP questions that assumption. They are fascinated by the Republic of Ireland, which has enjoyed a tremendous economic expansion despite or because of a population of three and a half million.

The SNP argues that the Scots economy, based on manufacturing and agriculture, is not particularly well served by a monetary union with the pound sterling, whose rates of interest and exchange are often dictated not by what suits makers of traded goods but by the ebb and flow of surplus capital into London. The Scots economy is sluggish and stable, whereas the metropolis and southern England are places of booms and busts in the stock market, housing and the high street. "Scotland is made to suffer the hangover, without being invited to the party," Wilson said.

Even as a Scot, I found all that hard to believe. Scotland is more like England than it is like anywhere else.The breakdown of the Scots economy into manufacturing and services is much the same as in England. There is proportionately a little more farming north of the border, but that is a minority activity anywhere in western Europe. The United Kingdom is, in terms of its economy, far less divided a nation than those heartlands of the euro, France, Spain, Germany and Italy. Indeed, European Monetary Union seems to have all the drawbacks of the United Kingdom on a continental scale: it treats western Europe as if it were completely undifferentiated, without culture or language, and prescribes a single draconian centralised regime for the most diverse economies. Anyway, in the 1990s, sterling has meant growth and employment, while the euro countries have stagnated and lost jobs. Scotland has prospered, dammit! It is as if the SNP wants the euro only because sterling isn't in it, and its feelings are largely negative (anti-London) rather than positive (pro-Europe).

That doesn't mean to say an independent Scotland wouldn't prosper. Just as Union unleashed Scotland's energies, after some delay, in the 18th century, so Disunion could do the same at the turn of the twenty-first. But that is a matter of hope. The euro may fall to bits like a bed with 11 people in it, and a severe economic depression would make the people of Caithness appreciate the deep purses of Crawley and Kensington. Violent instability might cause Scots to value the diplomatic and military power of the United Kingdom.

In the end, it comes down to politics, a science in every way superior to economics. !