For a crude world, Norway’s refined model

Updated October 01, 2017

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NORWAY’S massive sovereign wealth fund, financed mainly by its oil income, hit the $1 trillion mark last month, making screeching headlines all around. The number is 2.5 times Norway’s annual GDP and serves as the largest sovereign wealth fund in the world.

Today, the Norwegian sovereign wealth fund has few rivals in terms of size. Japan’s Government Pension Investment Fund was valued at 144.9tr yen ($1.3tr) at the end of March. China, of course, has about $3tr in currency reserves. There are also big cash-piles at money management firms such as BlackRock Inc’s $5.7tr and Vanguard Group’s $4.4tr.

But the Norwegian model is starkly different.

Norway, a country of merely 5.3 million people, began depositing oil and gas earnings into the fund way back in 1996. The objective behind setting up the fund was clear – to secure the economic prosperity of its future generations.

Despite being a major oil and gas producer, Norway continues to be a country with high taxes on the energy sector. The rate of taxation in the country could be gauged from the fact that despite being a leading oil producer, the price of petrol at gas stations in Norway is among the highest in Europe.

This has contributed to the distribution of the oil and gas income to all the strata of the society. Unlike many other energy-rich countries, using their income to meet their current needs, this small country has been using its energy riches toward a truly egalitarian society and keeping its income from oil and gas for posterity.

In order to achieve the objectives, the country has put into practice a very interesting mix of rules and regulations. Almost a decade ago, at the residence of a senior Norwegian diplomat in Riyadh,

Olav Akselsen, the then head of the Standing Committee on Foreign Affairs in Stortinget, the Norwegian Parliament told this correspondent, “as per the rules of governance, the government in Oslo is not allowed to touch the income from this precious natural asset – oil.”

All the income from oil thus goes into what is known as the special ‘Pension Fund’.

The government is allowed to use only returns on these investments – and that too only up to four per cent in a given year, Mr Akeslsen clarified. The rest is meant for posterity!

Mr Akselsen kept hinting, rather subtly though, that Norway was using this “finite” asset prudently and instead of opting for a “lifestyle” as many other energy-rich nations have done, Oslo has opted to invest the income for future generations.

For someone involved in the energy world, and its geopolitics, for decades, Norway presents a wonderful and exciting case study. Despite having immense energy resources, the country is not dependent on oil revenues for meeting its day to day needs. It has avoided the pitfalls of a ‘rentier’ economy.

It is a developed, mixed economy. It can boast of an interesting and strong industrial base too, with big names such as Statoil and Norsk Hydro operating at the global industrial horizon. This makes Norway a developed country.

While most other energy producers are using their energy riches to sustain a ‘lifestyle’ and ‘glitter’, Oslo has been keeping its economy far too independent of oil income. And that remains the key difference between Norway and other major oil producers.

Even Saudi Arabia, with its ‘Vision 2030’ is now endeavoring to finance its current bills by investing the oil income into foreign economies. The ‘vision’ of Prince Mohammad bin Salman – enunciated by a Mckinsey team and at a hefty price – continues to depend on oil earnings one way or the other.

The earning from these investments would continue to be used to buffer the current expenditures. Could the addition of a few hundred billions of dollars into its Sovereign Wealth Fund, by selling the family silver – the shares of Aramco make a real change in long-term earnings of the country is still to be seen? Depending on oil income to finance the bills of today could be a recipe for disaster. No economy could survive just on investments.

And then such investments are not without political risks. In challenging times, the invested money could be blocked – on political grounds. And the next door, Tehran knows it well.

With ongoing litigation in the US even the Saudi asset lying in the Treasury in Washington and elsewhere could be frozen who knows.

Economies need to be diversified on solid footings to survive. A strong industrial base, and not just a vision to invest the oil money elsewhere, is required to survive, sustain, develop and grow. Norway remains a role model in this direction.

Published in Dawn, October 1st, 2017