Norway is now the second richest country in Europe, in terms of income per person, after Luxembourg. The population of 4.6million is a little smaller than Scotland’s.
Much of the country’s wealth has been derived from oil&gas because Norway has become one of the largest producers and exporters in the world. The original in-place reserves are similar in size to the UK, but the two countries have followed two significantly different exploitation strategies.
In the UK, the basic policy was to develop the reserves as quickly as possible. In contrast, Norway adopted what was officially described as a moderate rate of development intended to extend production over a longer period.
Looking at the situation now, it would be easy to conclude that the Norwegian strategy was much the better one. The SNP, in particular, has long argued that we should have followed the Norwegian model.
Such a conclusion, however, fails to take account adequately of the UK’s economic position in the 1960s and 1970s. I have no doubt that, over a 20-year period, the UK economy – and most citizens – benefited substantially from the rapid development of North Sea oil&gas fields. Even today the industry contributes about 25% of the UK Exchequer’s tax revenues.
Norwegian oil production has passed its peak and is now declining, as in the UK, but gas production continues to rise. The oil reserves:production ratio is 8.2, implying that the country can produce at the current level for only another eight years. The UK ratio is just 3.6.
The gas reserves:production ratio in Norway is 33.0, compared with only 5.7 in the UK. Thus gas will be become increasingly important for Norway.
What I want to highlight this month is what Norway has done with its oil&gas revenues such that it is now the second most prosperous country in Europe. It is a good model, not just for Scotland, but most other oil producers such as Saudi Arabia and other members of Opec.
Norway passed legislation to ensure that a substantial proportion of the revenues went into a separate fund rather than into the Government’s current revenue account (as in the UK). The fund was to be used to invest for future generations instead of current expenditure.
The oil fund is now known as the Government Pension Fund and currently has assets of about £200billion, making it the second largest such fund in the world. The total is equivalent to about 120% of the country’s annual economic output (GDP).
In addition, the Norwegian government usually operates a budget surplus. That contrasts markedly with the situation in the UK, where the public-sector finances are in dire straits.
The standards of public services in Norway are generally excellent.
Nevertheless, government spending as a proportion of Norwegian GDP has fallen from 48% in 2003 to 40% in 2008. In the UK, over the same period, it rose from 42% to 47% and will inevitably rise further over the next few years because of the Government’s bailouts of the RBS and other banks.
Norway’s Government Pension Fund seems to have been very well managed. It has spent about £40billion over the last year buying stocks in the belief that they were undervalued because of the worldwide financial crises.
The timing of that appears to have been near perfect. Of course, the fund had the money to do that, unlike many other investors.
Energy economists in the past used to refer to Dutch disease, attributed to rampant inflation caused by revenues from the Dutch gas fields in the 1970s. That has largely been avoided by Norway. The cost of living is very high, as any visitor to Norway will know, but that is offset for residents by the excellent public services.
The country also seems to have avoided the danger of spending revenues on showcase projects of dubious economic value, as has happened in many oil-rich countries – in the Middle East, Kazakhstan and Nigeria, for example. There is no chance of the bubble bursting, as may happen in Dubai and elsewhere.
The large gas reserves should ensure substantial revenues for the government for at least another 20 years. Even when the gas eventually runs out, the Government Pension Fund will ensure Norwegian prosperity for the foreseeable future.
And in the UK?
Tony Mackay is MD of economists Mackay Consultants
