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a blog from young economists at Nova SBE

Norway: The oil nation

Norway as an oil nation is an interesting area to look at and see how the oil income can impact the economy in Norway. One can look into the past and get a historic view of the oil industry in Norway: Several companies started to look for oil outside the coast of Norway in the 60s, and in 1969, the first oil was found (Samfunnskunnskap). After that, Norway has developed to be an oil nation and in 1990 the Government Pension Fund Global, called the Oil fund, was founded. The fund is based on income from the petroleum production and is set up to provide an income stream after the petroleum production run out (SNL).

Norway is one of the countries that have the highest export of oil to other countries and this has a big impact on the Norwegian economy (SNL). The oil revenues in the Norwegian economy come through taxes and the government direct ownership on the continental shelf (NorgesBank). If all of this income was used now, it would lead to big imbalance in the Norwegian economy because it will lead to inflation and loss of competitiveness (the Norwegian currency will be so strong that no other countries want to do buy anything). To avoid that, the Government is following a rule (Handlingsregelen) to limit the use the oil income (Norske-regjeringen).

“Handlingsregelen” determines how much oil revenue that could be used in the national budget, but it does not say how to use it (Norske-regjeringen). For instance, it can be used for increased public spending or tax reduction. If the Government will increase the use of oil revenues in the national budget (pursuing an expansionary fiscal policy by reducing taxes and increasing government purchases of goods and services), it will cause the GDP to go up which will provide increased capacity utilization and unemployment goes down (Norske-regjering). These effects will only be short-lived because expansionary fiscal policy can not affect the equilibrium unemployment. As one can see, through this rule one gets a steady use of the oil money over a longer time.

The oil income is contributing to build a solid national wealth through the oil fund. With this structure in place Norway will get a smoothing effect which will distribute the wealth created now, over several generations. Then, one can ask the question – how should the Government in Norway use this fund? “Handlingsregelen” only gives a limit for how much of the oil fund revenues any particular government can use in one budget year. It does not say anything about how and where in the budget to allocate it. Should Norway invest in education, research etc. to ensure that we do not only send a positive national wealth forward to the next generation, but also a community which has a viable business (as a result of education and research)? One may consider if “Handlingsregelen” should add that the Government have to use some of the money on research and education.

Kaja Tronsgaard

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Author: studentnovasbe

Master student in Nova Sbe

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