Why Norway is not panicking about the oil price collapse

Steady as she goes. Simon Pedersen

Norway’s petroleum sector is its most important industry. The petroleum sector accounts for 21.5% of its GDP, and almost half (48.9%) of total exports. In 2013 Norway was ranked the 15th-largest oil producer, and the 11th-largest oil exporter in the world. It is also the biggest oil producer in western Europe.

Oil is therefore regarded as a vital national resource and is the backbone of the Norwegian economy, though just like in the UK, its best years are in the past. Production levels have been dropping since the turn of the century, peaking at 3.5m barrels per day in 2001 to less than 1.9m in 2014.

Norway is not a member of the Organisation of the Petroleum Exporting Countries(OPEC), and in principle it sets prices based on the current market. But with OPEC having a virtual monopoly on global pricing, Norway in effect remains subject to the cartel’s pricing decisions. Norway is thus vulnerable to the volatility in oil pricing, and with regard to the structure of the sector and its role in the Norwegian economy, this vulnerability is extended throughout the society as a whole.

With the unsettling and dramatic slide in oil prices since June 2014, Norway has of course been substantially affected. Two months ago, Statistics Norway cut this year’s GDP forecast from 2.1% to 1% on the back of lower prices. A few days later the central bank unexpectedly cut interest rates to an all-time low of 1.25% to help stimulate the economy. Some 12,000 jobs are being cut as the oil industry pares back about 10% of its workforce, and there are fears that nearly 30,000 more could follow.

Statoil and the oil industry

Oil in Norway is dominated by Statoil, the largely state-owned oil company, which controls about 70% of the country’s petroleum production. It reported staggering losses in the third and fourth quarter of 2014 that were partly the result of the lower oil price – the company’s first loss since it listed on the stock market in 2001. Its share price is also down about a quarter on last summer. The majority of job losses in the sector are due to cost-cutting and reductions to capital expenditure that are aimed at steadying the ship.

Staggering losses: Statoil. EPA

Experts regard the low price as a difficulty mainly for the profitability of specific expansion projects, meaning that they could be postponed or even cancelled. High oil prices have made certain investments possible, which are now in trouble. For instance Statoil has held off on decisions on a US$6bn investment into the Snorre field in the North Sea and the huge Johan Castberg field in the Barents Sea.

Consultancy Wood Mackenzie is forecasting that petroleum investments in Norwegian waters will be down 25% this year, with foreseeable cuts in subsequent years too. There is at least one consolation for the industry: the huge Johan Sverdrup field, which is due to begin output in 2019, appears to be viable at prices beneath US$40 a barrel.

The Norwegian government also recently announced that by way of stimulus it would award a tranche of new oil and gas drilling licences next year, including opening up the first new area for exploration since the 1990s. It has also called for the sector to adapt, suggesting that the height of exploration and development has been achieved for oil exploitation, and the sector must now consolidate its position. However, so far there have been few specifics.

The national budget

Unlike in the UK, the main narrative in the Norwegian media is not about cutting producer taxes but worry about the state failing to obtain its expected revenue as outlined in the country’s budget. Some experts believe that if the trend continues the actual revenue collected for the pension fund this year could be as low as half of what was budgeted, which would doubtless be a blow.

Last month, Norwegian prime minister Erna Solberg and finance minister Siv Jensen held a press conference on the situation, underlining that the government is prepared to take action if this becomes necessary, but that for the time being, the state budget is sufficiently capable of containing the situation. This means there are currently no plans to make cuts to the budget to cope with lower revenues.

Sovereign wealth

The big advantage that Norway has is the US$860bn (£565bn) Norwegian Government Pension Fund Global into which the oil money is deposited. Intended as an investment for future generations, it is the largest sovereign wealth fund in the world.

Norway owns an estimated 1% of global stocks and is considered to be the largest state owner of European stocks. For a country with a population just over 5m, this is a position of remarkable economic strength – thanks primarily to petroleum. The revenue of the sector is not only important as an economic boost, but also as the foundation of the Norwegian welfare state.

Norwegian oil capital Stavanger will have less for the national oil fund than usual. Sergio Pani, CC BY

The government is able to spend up to 4% of the fund every year to finance its budget, albeit for investments rather than direct spending. This year, despite a substantial increase to the level of spending, it will still only run to about 3% of the total. This is also a country in which unemployment is very low – below 4%.

In short, the fall in oil prices is problematic but by no means catastrophic for Norway. The general reaction is a pragmatic one: Norway is in the hands of the global market, and will do what it can to maintain a profitable and responsible petroleum sector that serves the interests of the country. There are no illusions that the oil will last forever, or that prices must remain unnaturally high, and it is perhaps precisely these kinds of vulnerabilities that the Norwegian system safeguards against. Short-term losses are expected, but there is continued optimism for long-term gains.