Is Nordic Success Just Oil?
Has oil money funded all Nordic welfare services, economic prosperity and social development?
INTERNATIONAL media will often write various excited or positive stories about Nordic countries:
- How Iceland Got Teens to Say No to Drugs
- Helsinki’s radical solution to homelessness
- How the Finnish school system outshines U.S. education
- Sweden is still the second most innovative country in the world
- How Norway turns criminals into good neighbours
- McDonald’s Workers in Denmark Pity Us
These stories are reflected in various rankings and statistics such as the UN Human Development Index or world happiness report which tend to show Nordic countries capturing most of the top spots.
While us Nordics are naturally flattered by a lot of the positive rankings, I cannot say that somehow “winning” these kinds of development indexes is important to me. To me it seems more important if we can shine some light on what kinds of choices a society can make to make a happier and healthier population. Many people around the world are looking for a path for their country.
Through history one has tended to look at the big powerful countries. But should countries such as the US, Russia or China necessarily be role models for everybody else to follow?
There may be lessons to learn from a variety of smaller countries. Just to be clear I don’t think one should limit oneself to Nordic countries for inspiration. There are good ideas to be found in other relatively small countries such as Ireland, Singapore, Netherlands, Switzerland and Estonia as well.
The Threat of the Nordic Model to Conservatism
There are those who are not thrilled to see the Nordic model as a source of inspiration. Instead they see the Nordic way as a threat to their ideological beliefs. Having discussed these topics with various people over many years I see some clear trends: Nordic solutions tend to be deeply unpopular with conservatives and libertarians. The reasons are not surprising. Nordic countries are the birth place of Social Democracy: high taxes, extensive welfare services, soft-on-crime, non-religious and active governments.
In short Nordic countries are not exactly examples of the policies preached by the high castles of capitalism: Cato Institute and Heritage Foundation. Nor are we very popular with conservative religious people with our liberal social policies and soft-on-crime approach.
Thus invariably any article or study praising Nordic countries will have a subset of conservatives/libertarians who want to dismiss the whole thing by claiming it is all down to an ethnically homogenous population, or it is because everything is so easy in small countries.
However, in this story I will tackle a different claim: That Nordic success is just all a product of oil. I have began noticing how this claim pops up in almost any context where Nordic countries are discussed.
Talk about Finnish education, parental leave or how they ended homelessness and some clueless guy will claim it was easy for Finland because they are swimming in oil. No buddy Finland isn’t producing a single liter of oil.
Talk about Danish happiness, health care or generous and active job retraining programs and somebody will say the magical “oil” word. Except Denmark has tiny amounts of North Sea oil. Oil makeup 0.4% of Danish GDP. In comparison a 8% of American GDP is generated from oil.
The Influence of Oil on The Nordic Economy
There is really only one oil producer in the Nordic region and that is my home country Norway. Currently oil exports makeup 14% of the Norwegian GDP. That is not as high as I think may would have thought. For comparison it is 42% for many of the Gulf states such as Saudi Arabia. It also is not that far away from the size of the American oil and gas sector, which makeup 8% of the economy of the United States.
In fact if you look at the Nordic region consisting of Norway, Denmark, Sweden, Iceland and Finland as one it has population somewhat lower than Canada. Nordics is 27 million people while Canada is 38 million. Yet oil and gas exports is a much bigger part of the Canadian economy than the Nordic economy.
In fact if you look at oil production for the whole Nordic region it contributes to the economy only at half the level of the US. Only 4% of the Nordic GDP is oil based (Norway included).
So oil is not a big part of the Nordics but what about Norway? Can Norwegian prosperity and success be explained alone by oil? Let us put this question in context, because many people don’t seem to grasp that oil production in Norway and oil production in Gulf States like Kuwait, UAE and Saudi Arabia is fundamentally different.
Oil Extraction Cost Differences
The cost of extracting oil is widely different across the world. For instance the average depth of an oil well in Texas is just 300 meters. The Draugen oil platform in the North sea in contrast is 250 meters deep down to the seafloor. In the North sea one has to drill several kilometers for oil. Building a derrick on land to extract oil is relatively cheap (a few million dollars). Building an oil platform is extremely expensive. The recent Aasta Hansteen platform for instance cost 4.2 billion dollars to build (38 billion NOK).
For this reason looking at how many barrels of oil a country sell doesn’t give a good indication of how much that country is profiting from oil. Norway sells a lot of oil but the cost of production is high. That is why we look at oil rents:
Oil rents are the difference between the value of crude oil production at regional prices and total costs of production.
Oil rent is much lower for Norway than a typical Gulf state. In Norway it is 4.8% while it is 42% in Kuwait and 40% in Iraq.
Historical Oil Production
When assessing the impact of oil production on different economies we have to take into account that oil production started at very different time periods. In the US oil production began already in 1859. In Russia even earlier in 1843. Saudi Arabia began production in 1938. Norwegian oil production did not get started until 1971. Due to enormous investment costs the oil industry did not begin to give a net gain to government until 1978.
Judging Norwegian economy based on current oil production thus gives a wrong idea of historical development. Even if Norway produces more oil per capita than the US for instance it began much later.
Thus we can compare by adding up the oil produced per year since 1900 (don’t have data for earlier years) for different countries. Imagine allocating oil to each citizen every year. How long would it take for the average Norwegian citizen to have accumulated as much oil as the average American citizen based on Norwegian oil production? It turns out that this doesn’t happen until 1989 in Norway.
Another way to frame this is that until 1989 Norway did not have any advantage over the US in terms of aggregated oil revenue. Quite the contrary Norway was at a disadvantage since North Sea oil drilling is far more expensive and technological demanding than drilling in California, Texas and Oklahoma.
How was life in Norway in 1989? The fundamentals of the Norwegian welfare system was already in place, such as free health care and higher education, public pensions, generous unemployment benefits, sick leave. When I was born in 1978 paid maternity leave was 35 weeks. Even way back in 1909 there was 6 weeks paid maternity leave.
Consequences of Oil Wealth to Norway
It would be wrong to imply that oil income had no impact on Norway. However, to imply that the welfare system could not have existed or have been funded without oil income is simply wrong. As pointed earlier the government did not have any oil money to spend until 1978 and all the key parts of the welfare system existed then. Perhaps a more obvious point is the fact that our Nordic neighbors without oil have much the same welfare system.
So what exactly is the impact of oil on the Norwegian society? It primarily manifest itself in private wealth and income. Norwegians have much higher salaries than Swedes and Finns e.g. Norwegians have more disposable income. It means Norwegians go more on vacation and blow more money when on vacation.
Norwegians generally have bigger houses and with better standard. They tend to have more expensive smart phones and other gadgets. Norwegians spend something like 3 times the European average on hiking and sports equipment.
If I compare to my own childhood, we go more out to eat and generally buy more stuff. Houses are not really bigger but fancier. Things like heated bathroom tiles did not exist when I was a kid, but is something everybody has today.
Conclusions
The Nordic model isn’t built on oil money any more than the say the Canadian or American social and economic model is built on it. Norway isn’t considered a petrostate by think tanks such as the Cato institute:
This separates states like Saudi Arabia or Nigeria, where the government relies on oil wealth for revenue, from states like Norway, Canada or the U.S, which are major oil producers but have well‐diversified economies and broad tax bases.
If you are interested in a better understanding how how the Norway developed a modern economy you can read my account of Norwegian economic history from 1800 to 1945: How Norway Got Rich Against All Odds Before Oil.
The industrial development of all Nordic countries from 1900 to the present: The Secret Story of Nordic Prosperity.
Finally, let us not forget that valuable resources played an important role also in growing the American economy: No, Capitalism Did Not Make America the Richest Country.
Also, let me clarify why I make many comparisons with the US. Many Americans especially on the political left are interested in knowing more about the Nordic model. American media also tends to feature a lot of misconceptions about Nordic countries in general. I have noticed this frequently while watching segments from FOX News or simply reading analysis from Cato Institute or the Heritage foundation. Hence, I have made it a bit of my project to bring more info about the Nordic model to an English speaking audience.
