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How Norway Deals with its Oil

When we think of macroeconomic indicators that can give us an indication of the well-being in a society, we employ measures that we deem apposite to factors we care for, such as wealth, equality, and development, just to name a few. We can try to measure them by observing GDP, the Gini coefficient and the HDI, or, respectively, any equivalents. Irrespective of which we apply, we will notice the same countries contending for the top spots. Not rarely will we then see one particularly strong candidate: Norway, a leading nation in factors like wealth, equality, human development, but also happiness, democracy, and freedom of press. Last week, Norway’s sovereign wealth fund (Government Pension Fund Global) hit the headlines as it surpassed the striking mark of one trillion dollars in assets by market value. Remarkable indeed, considering the fact that its equities, which constitute about two thirds of its total assets, hold more than one percent of global stock market shares. To see how a country as small as Norway, with a population of just above five million people, has come to be a global player in financial investments, we need to comprehend the foundation of Norway’s riches: Natural resources, and in particular crude oil and natural gas.

Oil platform “Ekofisk”

The composition of Norway’s economy is rather unusual in the European context as it is largely dependent on the exports of crude oil and natural gas. Put in numbers, these two commodities account for about 40% of the value of all Norwegian exports and about 20% of the country’s gross domestic product, which places Norway among the top ten petroleum exporters in the world. Nonetheless, in keeping with the economic models of its Scandinavian neighbors, it has a mixed economy with strong government intervention and a comprehensive and generous welfare state that is largely funded by its oil revenues. Since the first drills off its shores in 1969, Norway has experienced strong economic growth and is now considered one of the very wealthiest countries in the world. The government plays a significant role in the petroleum sector. By controlling the market leader Statoil, oil and gas account for just less than 30% of the state revenue. As the country’s wealth is largely based on the exploitation of natural resources, this raises the concern about a lack of diversification in the economy. The economic complexity index (ECI), which analyzes countries for the diversity of their exports, attests Norway a score that lies behind other European and developed nations, with Sweden, Norway’s less wealthy neighbor, standing out in particular. Nevertheless, productivity levels are surprisingly high (even when corrected for the petroleum sector) despite a low level of innovation, which is often called the Norwegian paradox by scholars.

Oil as a natural resource commodity is commonly very much coveted, promising high revenues since demand is high due to the good’s relevance in virtually all parts of modern industrial production. A downside to the international market of oil, however, is the volatility that accompanies it. Dependency of a country on proceeds from oil can be fatal for state revenue when global oil prices fall, as seen in the recent dip of prices since 2014 that made many oil-exporting countries feel the economic burden of their dependency. Aware of this, the Norwegian government instituted a sovereign wealth fund in 1990, that is, an investment fund owned by the state, to invest excess revenues originating from the petroleum industry by means of taxation, licenses, and dividends, in order to counter the above mentioned potential disruption effects that a sudden decline in the oil price can entail (stabilization fund). Another element of this reasoning is the realization that the oil and gas fields from which these high revenues come must inevitably deplete in the future. So, the Oljefondet (Oil Fund) is designed as a savings fund, too, and as a repository for future pension payments. It is worth mentioning that it is not only the sheer size of the fund that has a hand in its prominence. Since 2004, every investment by the state fund is subject to the tight scrutiny of an ethical council, prohibiting certain investments related to human rights violations, health hazards, and such. As a result, many companies across the globe have been excluded from investments from the fund.

It seems Norway has been very successful in handling its abundance of natural resources. This becomes evident as the Oil Fund is the biggest sovereign wealth fund in the world and has now surpassed a value of a trillion dollars. As stated early in this article, the country is doing well. Corruption is one of the lowest in the world despite high profits from natural resources, which implies a strong rule of law and social cohesion. Norway’s success with dealing with its oil becomes apparent when we look at countries that face similar abundance in resources. Ten years before the first oil drill in Norway the largest natural gas field in Europe was found in Groningen province in the Netherlands. The subsequent exploitation and the large increase in Dutch exports provide the object lesson that would give occasion for what is called the Dutch disease in economics. In the 1960s, the increase in exports led to an appreciation of the Dutch guilder, making other economic sectors such as manufacturing less competitive. Now that gas extraction is declining, there is no such fund that the Dutch could fall back on. Reality is even grimmer when looking at the Nigerian paradox: Nigeria, a country immensely rich in oil, has an economy almost entirely based on the exploitation and export of the resource. However, due to a lack of strong and well-functioning institutions (e.g. corruption), the oil revenues hinder the rest of the economy to develop rather than actually contribute to reducing poverty. Nigeria is also one of many oil-based economies that suffer greatly from the sustained decrease in global oil prices, besides countries like Russia or Venezuela. In the latter, oil had been an easy source of income for the government to finance welfare. With oil prices down, the country is on the verge of collapse.

Norway has come a long way making every effort to deal with its natural endowments in a sensible manner. To prevent negative effects such as those arising from the Dutch disease, it has successfully established a fund for the future. There is no occasion, however, for neglecting the challenges the country is facing as well. With oil prices low and declining oil reserves (Norway is believed to have passed the peak of its oil production), the country will need to realign and diversify its economy at a high pace. In addition to that, a country that places such great importance on values such as equity and sustainability (Norway generates 98% of its electricity through renewable energy) while being one of the largest producers of fossil fuels at the same time will need to consider in which direction it will want to lead its economy in the future. Nonetheless, Norway’s success shows that it can lead the way for other countries in reasonable dealings with natural resources.


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