What Happens to Norway Without Oil Income?
There is a common perception that Norway as we know it today is unsustainable and will radically change once oil runs out. But is that true?
It is commonly assumed that Norway is in a similar situation to oil-rich Gulf states with respect to a future without oil. However, we need to look at the specifics to explain why this is not the fact and why Norway will most likely handle a future without oil quite well.
Superficially, a world without oil exports seems hard for Norway to handle. According to various metrics, Norwegian oil exports make up 60% of exports and 25% of Norwegian GDP. How can a country survive that big of a hit to its exports?
To answer this, we first need to understand the role of exports in any economy.
The Purpose of Exports
We are used to thinking about exports as something you want to do as much as possible of. However, this is a flawed thinking. Exporting means you are shipping goods out of your country. Naturally, you want goods and services shipped into your country, not out of it.
Thus exports are not done because they are inherently good, but because they are a necessary evil. Exports exist to balance imports.
The Norwegian economy in 2019 imported goods and services to a value of 757.9 billion Kroner. The Norwegian currency is named “kroner,” often shortened NOK (NOrwegian Kroner) to distinguish it from Swedish and Danish Kroner.
Countries abroad don’t take payment in NOK. They take payment in Euros, dollars, yen and other currencies. Thus for Norway to buy products from abroad, it needs to obtain foreign currency. Norway can do that by exporting products that foreign countries want, and thereby obtain foreign currency. This currency can then be used to buy foreign products and services that Norwegians desire.
Thus for any country to sustain its standard of living, it needs to balance its exports and imports. In truth, reality is a bit more complicated than that. For instance the US is running a major trade deficit every year, but still seems to be doing fine. Why?
What Happens When There is a Trade Imbalance?
In reality, there is never really a trade imbalance. If a country such as the US buys more goods and services than it sells, what happens is that foreigners get a lot of dollars that they do not actually use to buy things in the US.
What do they do with these dollars? Do they hide them under their mattresses? No, they typically lend those dollars back to Americans or they buy assets in the US such as stocks and property. Thus there is no actual trade imbalance. The apparent shortage is being made up by purchases of property and stocks in the country with apparent shortage.
Is this good or bad? It could be bad in the long term, as foreigners could be gradually taking over the companies in your country and thus have a right to their profits. But if your economy is growing faster than the rate at which foreigners are gobbling your assets, then there is no problem.
Secondly, this does not take into account the fact that a country may already have major holdings abroad. For example, the US owns lots of property and companies abroad. In fact, the US owns more abroad than foreigners own in the US. Thus, despite the apparent trade deficit, the US isn’t actually in a bad situation.
But enough about the US. We were talking about Norway. Let us get back to that.
Getting the Facts About Norwegian Economy Right
Before we can discuss exports, imports, deficits or surpluses, we need to get the facts about the Norwegian economy. Let us look at what Norwegian business newspaper E24 says in this story: Norway less oil dependent than during last crisis.
- In fact only 33% of Norwegian exports are oil and gas today (net export).
- Only 14% of the GDP is oil and gas related.
This even inflates the numbers for the oil sector. We have to take into account that a lot of Norwegian GDP involves activities in the North Sea such as exploration, drilling, building platforms, and so on — all of which will no longer be necessary after the oil industry is closed down. For instance, building an oil platform adds to Norwegian GDP, but has no effect on the perceived wealth and prosperity of mainland Norway. Thus if we look at the influence of the oil industry on mainland Norway (excluding the North Sea activity) then that is 8.8%, significantly lower than the assumed 14%.
How To Replace Oil Exports
It is easy to assume that if the oil industry is gone, Norway needs to find another industry to replace the 33% of its exports which are suddenly gone. But this is simply not true.
As I explained earlier, a country really only needs to match its imports. Norway needs to export goods and services of equal value to its exports.
According to SSB (Norwegian Statistical Central Bureau) Norway had this trade balance in 2019:
- exports of 914.7 billion NOK
- imports of 757.9 billion NOK
This means Norway is exporting 156.8 billion NOK more than it actually needs to support its imports. Hence not all imports needs replacement.
Now it is a bit tricky to determine how much Norway actually needs to replace. If we use the 33% of exports number, we get that Norway needs 145 billion NOK to match its imports if oil is gone.
757.9 - 914.7 × (1 - 0.33) = 145
However, SSB itself operates with the number 277 billion NOK as the trade deficit seen from the perspective of the mainland Norway. Hopefully I can find out the right number with further research. The import part is that one has to exclude things that are no longer necessary without an oil industry.
One has to take into account that a lot of quite expensive imports of goods and services to Norway only exist due to the oil industry itself. Without it, those imports can be deducted.
Anyway, let us be conservative. How will Norway plug the hole of 277 billion in missing exports?
The Oil Fund to the Rescue
This is where Norway having been prudent and saving a lot of the oil money over many years pays off. Norway has over 10 000 billion NOK in foreign assets. This is in the form of stocks, property and other valuable assets, all of which naturally appreciate in value every year because the businesses owned naturally expand and grow. The average index fund gives a return of 7% annually. That is a very conservative estimate of how much the oil fund can make each year.
That means Norway in principle has 700 billion NOK to blow each year without making itself poorer. That easily covers the 277 billion needed for imports.
Let us reflect a bit more on how this works. To buy stuff from abroad to consume locally in Norway, Norway needs to get its hands on foreign currency. However, Norway already owns a staggering 1.4% of the global stocks, shares and assets. These increase in value each year, measured in foreign currency such as dollars, Euros and yen. Norway can simply take some of the money generated from these foreign assets to fund its imports. As long as it spends less than the fund appreciates in values each year, there is no problem.
How does this money get into the economy? Basically, the Norwegian government sells foreign assets and uses that money to buy Norwegian currency, which is then spent on the government budgets. This money trickles into the economy in the form of pensions, salaries to government employees, etc.
These people can then indirectly import stuff from abroad. When they are changing their Norwegian Kroner for foreign currency they are really just getting back the foreign currency the Norwegian government sold earlier to obtain Norwegian currency. It all comes full circle.
Statistically speaking, it will look as if Norway has a large trade deficit. But in reality due to the large ownership of foreign assets this is completely sustainable. In fact the US is in somewhat similar situation although in the American case it is private American companies owning a lot of foreign assets, not the US government.
This Sounds Too Good to Be True!
It may seem incredible that Norway can stop pumping oil without consequence. But that is not entirely true. While Norway is pumping oil the oil fund would keep growing faster each year than it would be doing without the oil income.
The key reason why it has so little apparent consequence is because Norway was primarily saving money rather than spending. If you make a million dollars per year but live as if you made $50 000 per year then reducing your salary to $50 000 will not make much of a difference to your every day life. The key difference will be that your savings account will not keep growing as fast every year as it used to.
For anybody who has been to Norway, this should not surprise anyone. Norway does not look like an affluent oil rich Gulf state. The opulence of places like Dubai where the police drive hypercars such as Bugatti does not exist in Norway. There are not many Bugatti, Bentley or Rolls Royce in Norway. In fact I have yet to see any. You will, however, see a lot of Teslas.
How Norway Spends Money
Norway doesn’t look opulent for several reasons:
- It simply hasn’t spent a lot of its oil money. It saved it.
- Norway spends a lot of money on things which are not readily visible and which is not very glamorous.
For example, Norway spends a lot of money to maintain a spread out population with lots of small local farms. Not very flashy but it means very high food safety. Norway is one of the countries with the lowest levels of antibiotic usage in agriculture. Salmonella is rare. You can often eat raw eggs in Norway. That is due to small farming units, which reduce chance of spread of disease. It also meant that during COVID19, Norway had a surprisingly well-secured food supply.
Norway also spends a lot on children. If you go around Norwegian neighborhoods, you might be surprised by the share number of preschools and their quality. It also spends a lot on a humane prison system. A humane prison with good activities for rehabilitation is not as visible as a Rolls Royce parked on a flashy shopping street.
A big difference is that even people doing manual labour get paid well. In oil-rich Gulf states, there is an army of people from the third world working for very low salaries. That leaves more money for gold ornamentation and Bentleys. Paying your fast food worker decently leaves less money for luxury.
Conservative Intolerance of Norwegian Success
Part of the reason I write this story is because I so frequently encounter conservatives on social media who want to insist that social democracy is unsustainable. Their idea is that the human nature of social democracy with socialized health care for all, free college, etc., is some sort of luxury indulgence that cannot last.
It doesn’t matter that you point out that Sweden, Iceland, Finland and Denmark are all doing just fine without oil. They have well-balanced budgets and growing economies. They have been doing fine for years.
There seems to be this morbid desire to see Norway in particular fail. Because many conservative fans of freewheeling capitalism cannot tolerate that a middle-of-the-road system where government plays an active role is a success. They must cling to the idea that Norway is just something that lives on borrowed time.
The irony of this is that if you look at the history of oil-producing states in the US, it is not a good argument for freewheeling capitalism. One can look at Oklahoma as an example. The Economist has an eye opening story: What’s the matter with Oklahoma?.
The Economist writes:
Teacher pay is the third-lowest in the country and has triggered a statewide shortage, as teachers flee to neighbouring states like Arkansas and Texas or to private schools. “Most of our teachers work second jobs,” says Darlene Adair, Wagoner’s principal. “A lot of them work at Walmart on nights and weekends, or in local restaurants.” Ms Adair hopes that Walmart does not offer her teachers a full-time job, which would be a pay rise for many.
How could this happen to an oil-rich state? Why are they not more like Norway? Because ideologues treating capitalism as magic fairy dust did the following:
As in Oklahoma’s northern neighbour, Kansas, deep tax cuts have wrecked the state’s finances. During the shale boom, lawmakers gave a sweetheart deal to its oilmen, costing $470m in a single year, by slashing the gross production tax on horizontal drilling from 7% to 1%.
It is easy to excuse Norwegian success with oil revenue. In reality, if you look around the world, very few countries actually manage that wealth well. Most oil-rich American states splurge that money on tax cuts. Why is that stupid? Because oil revenue goes up and down like a yoyo. A prudent government stashes away excess profits in good years to spend in bad years. But the dominating capitalist ideology in the US does not allow governments to save money for the future.
We saw the same with Margaret Thatcher’s Britain. Britain, despite pumping more oil than Norway from the North Sea, has no oil fund at all. The Guardian gives some answers:
When the North Sea was providing maximum income, Thatcher’s chancellor, Nigel Lawson slashed income and other direct taxes, especially for the rich. The top rate of tax came down from 60p in the pound to just 40p by 1988. He also reduced the basic rate of income tax; but the poor wouldn’t have seen much of those pounds in their pockets, as, thanks to the Tories, they were paying more VAT.
In other words, the Thatcher government used oil revenue to cut taxes for the rich and thus enrich the upper class in Britain. Essentially, the oil revenue was transmitted to the rich. This policy had some bad consequences:
What did Thatcher’s grateful children do with their tax cuts? “They used the higher disposable income to bid up house prices,” suggests Hawskworth. For a few years, the UK enjoyed a once-in-a-lifetime windfall; and it was pocketed by the rich.
Rather than using oil revenue to support a welfare state with better child care, health care services, pensions, education, etc., Britain ended up with high real estate prices.
This is not an attempt to crap on Britain. Instead, it is meant to poke holes at this conservative ideological insistence that somehow they are the most prudent spenders of money and that anyone with the slightest socialist inclinations will waste the money. It will be my claim that Norwegian social democrats spent the Norwegian oil money far more wisely than politicians in the US and the UK, who are/were driven by pro-capitalist conservative ideology.
It is not social democracy that is unsustainable. It is neoliberalism that is not sustainable.