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?

Erik Engheim

Jan 12·11 min read

It is commonly assumed that Norway is similar in 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 that Norway will most likely handle a future without oil quite fine.

Superficially a world without oil exports seems hard for Norway to handle. By various metrics Norwegian oil exports has made 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. Exports means you are shipping goods out of your country. Naturally you want as much 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 imports goods an 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 obtain foreign currency. This currency can then be used to buy products and services from foreigners which Norwegians desire.

Thus for any country to sustain its standard of living, it needs to balance its exports and imports. Although reality is a bit more complicated than that. For instance the US is running a major trade deficits 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 are not actually spending to buy things in the US.

What do they do with these dollars? Do they stuff them in 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 of purchase of property and stocks in the country with apparent shortage.

Is this good or bad? Long term this could be bad, 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. The US e.g. 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, where where 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 etc which is no longer 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 elaborated earlier, a country really only need to match its imports. Norway need to export goods and services to equal value of its exports.

According to SSB (Norwegian Statistical Central Bureau) Norway has 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 numbers 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 operate 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 which are no longer necessary when there is no longer an oil industry.

One has to take into account that a lot of quite expensive imports of goods and services to Norway only exists 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 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 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. Thus 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 measures 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 use that money to buy Norwegian currency which is then spend 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 place like Dubai where the police drive hyper cars 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:

1. It simply hasn’t spent a lot of its oil money. It saved it.
2. Norway spends a lot of money on things which are not readily visible and which is not very glamorous.

Norway e.g. 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 anti-biotic usage in agriculture and where salmonella is rare. You can often eat raw eggs in Norway. That is due to farming units being small 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 pre-schools and their quality. It also spends a lot of having a humane prison system. A humane prison with good activities for rehabilitation is not as visible has Rolls Royce parked on a flashy shopping street.

A big difference is that even people doing manual labour gets a good pay. In oil rich Gulf states e.g. there is an army of people from the third world working for very low salaries. That leaves more money for gold ornamentations 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 which 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.

But there seems to be this morbid desire to see Norway in particular fail. Because many conservative fans of free wheeling 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 a 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 free wheeling 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 the 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. But reality is if you look around the world, very few countries actually manage that wealth well. Most oil rich American states e.g. splurge that money on tax cuts. Why is that stupid? Because oil revenue goes up and down like a JoJo. 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 making the upper class in Britain richer. Essentially the oil revenue to transmitted to the rich. This 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.

Thus rather than like Norway 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 instead.

This is not an attempt to crap at Britain. But rather 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 driven by pro-capitalist conservative ideology.

It is not social democracy which is unsustainable. It is neoliberalism which is not sustainable.