It’s been a strong relationship of 50 years in which Norway began its romance with the natural resource. Since discovery in the 1960s, exports of oil and gas have become an increasingly critical part of Norwegian life.
It’s a well-known fact that oil is a natural resource, and like all “sunset industries” it must come to an end. And at almost 2.5 million barrels of oil being extracted per day with just over 6.5 billion proven barrels of reserves left – Norway is running out of oil … fast.
In fact, according to Business Insider, that leaves just 7-8 years before Norway runs dry. And it’s of no surprise considering that North Sea Oil production has peaked – sparking disagreements over deeper exploration for oil in the Barents Sea as well as in the Arctic. Decisions to go further in finding more oil reserves are causing headaches for environmental and political organisations worldwide who continue to outline the hugely damaging effects of oil and gas production/ consumption.
So with the Norwegian oil industry in crisis, it begs us to question how heavily do Norwegians rely on the natural resource in keeping their economy and government afloat?
The treasure beneath Norway:
It’s no myth that behind the endless salmon farms, fjords and breath-taking landscapes, Norway is well-endowed when it comes to natural resources. The statistics speak for themselves – Norway is the 8th largest crude oil exporter in the world, 9th largest exporter of refined oil and also the 3rd largest natural gas exporter. Alongside this they host huge reserves of exploitable coal underneath its famous “continental shelf” so often debated about by environmentalists.
May 1963 was the turning point in post-war Norwegian history. In this month the government asserted sovereign rights over natural resources in its sector of the North Sea. Just three years later exploration began and by August 1969, the Ocean Viking drilled its first hole into a treasure chest of wealth. This was immediately a major factor in Norway’s historic decision to never enter the EU (then EEC) and build what has become one of the most sophisticated and welfare systems in the world.
It’s of no question that the very heartbeat of petroleum has been a major contributor in the development of the Norwegian welfare state. Using the research conducted on Norway vs Scandinavia before and after oil production in the 60s, a gap in GDP, total value creation, investments, exports and revenues grew between what were once all equal nations as a direct result of oil discovery.
But the major factor in pushing Norway above its neighbours economically was the establishment of the world-renowned Welfare State Fund in 1990 or the near $1trillion saved as a sort-of “rainy day” pot of cash if things get bad. It’s the world’s largest wealth reserve, amounting to $180,000 per person and is supposedly Norway’s answer to life once the marriage with oil has broken off and to prevent de-industrialisation. Thus, it’s of no surprise that 1/5 of Norway’s economy relies on this abundance of natural resources – but this according to many researchers translates more towards 35% of their economy when taking into account secondary industries that rely on the oil industry.
Life without oil:
The fact of the matter is that oil discovery has allowed Norway to differentiate in socio-politics among rivals in Europe and especially against its closest Scandinavian neighbours who operate among free markets while Norway continue to embrace its state capitalism, led by its national oil champion Statoil. The Norwegian state owns large takes in the country’s biggest companies, from its largest bank DnBNor, to the largest fertiliser-maker, Yara and Norsk Hydro – the largest aluminium producer. The resultant effect is that the state owns 37% of the Oslo stockmarket. A recent article from the Economist highlights how oil is Norway’s penchant for state capitalism, quoting Torger Reve of the Norwegian Business school:
“we invented the Chinese way of doing things before the Chinese”.
With a population density of just 13 people per square kilometre, Norwegians have always depended on the state to help manage the abundance of natural resources – minerals, fjords, forests and waterfalls to those isolated communities that no-one has ever heard about. And it’s the oil boom that led to a consequent boom in public spending that Norwegians seem to be so proud of. Since the 1970s, those employed in education has doubled and heath/ social services employment has quadrupled. The public sector now accounts for 52% of Norway’s GDP, with blue-collar workers earning three times that of their British peers.
It’s not all good news:
Among the world’s highest standards of living, wage rates and GDPs, oil wealth has not come without its own problems. The dominance of the industry has led to the monopolisation of technical talent – 50,000 engineers have been sent to offshore locations. And alongside this, property prices are rising by 7% a year, the Big Mac Index has become one of the highest in the world at $7.69 for a Big Mac (almost double the USA) and so the sky-high prices have led many experts to question Norway’s socio-economic trajectory.
To many researches, “Dutch disease” (an over-reliance on one industry) has become a common conclusion to Norway’s situation – which became apparent when oil prices began to fall in 2013.
This proved that, beyond the glitz, the Norwegian economy has become incredibly unbalanced …
… and according to Prime Minister Erna Solberg in an interview with the BBC: “… our strong currency left some of our traditional industries behind” which only echoes the idea that the prosperity of recent may only be temporary.
The sovereign wealth fund or “oil fund” mentioned above is supposed to be Norway’s answer to slowly parting ways from its reliance on natural resources. However, according to Reuters this isn’t the case with an “exposed economy unprepared for life after oil which threatens the long-term viability” of the fund. Experts instead argue that the government must limit wage increases to productivity and oil cost growth, cut taxes like its neighbours and spend less of the oil money. Some are even talking of depreciating the Krone. The knock-on effects of Norway’s current trajectory is that many of its workers are leaving and instead migrating to new jobs in Mexico, China and the USA, leaving only high-tech and automated jobs at home. Many of Norway’s wealthier inhabitants are moving to London to escape high taxes and a somewhat claustrophobic society.
Many speak of a complacency and dependence so great that as oil profits dwindle, the welfare demands will become increasingly burdensome and unfeasible. That added to the inevitable increase in unemployment will erode the nation’s wealth. Norway must re-direct investments away from Statoil – perhaps looking towards exploiting the high level of education and talented people and increase investment in home-grown technology development.
This session has outlined a trio of solutions Norway must take to get back-on-track towards a balanced economy.
- They must begin by ensuring it’s better placed to respond to the challenges of a dying industry that makes up 35% of GDP. The government should start off by reducing the 250,000 vulnerable oil-based jobs in the economy and aim to diversify it more towards renewable energy, eco-friendly processing, robotics, nanotechnology, fisheries, tourism and IT technologies which serve as natural priority areas for such an educated and developed nation.
- Norway must use the wealth made from the oil to stop state guarantees, tax cuts and special arrangements that incentivise increased oil exploration and instead redirect these towards other industrial sectors.
- Encourage elected politicians to step-up and take the reign of the Norwegian economy away from Statoil whose interests lie in profits not general welfare and put them back into a free-state government structure similar to that of Sweden.
It’s time to end the bureaucratisation born of Norway’s enthusiastic embrace of state capitalism and enter a new age of reforms that rely less on depleting natural resources.
If you enjoyed this article then please comment below. If you didn’t, then please also comment below to let us know why. We are always looking to improve!