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Europe

The Norwegian Model Has a Hidden Secret

 7 min read / 

The “Norwegian model” commonly refers to the economic and social policies pursued by the Norwegian government. Today, it is widely believed that this model is an economic miracle that combines free market capitalism with a rich welfare state, high living standards and collective labour bargaining at the national level, magically turning countries into “heaven on earth” places, making them the “most happy”, and so on.

With a population just over 5m, Norway, for the 13th consecutive year, is ranked as having the highest standard of living, life expectancy, education and healthcare system in the world and as such is considered by most economists as the premier “Scandinavian model” economy. However, this secret economic miracle has one not so secret, liquid ingredient.

Norwegian Miracle

Many believe that Norway’s welfare is mainly due to this magical economic model and its extraordinary socialistic policies, high-income taxes (Norway has a tax-to GDP ratio of 38.1%), labour unions and the excellent Nordic educational system. However, Norway is also the EU’s biggest oil and gas producer and the 8th largest worldwide. Historically, the oil and gas industry has played a vital role in the strong growth in the Norwegian economy over the past 45 years. When the first crude was extracted in 1971, GDP per capita in Norway was way lower than the average for developed western economies.

However, the picture has reversed since then and just half a century later the petroleum sector in Norway accounts for around 27% of value creation. Comparatively, this is more than twice the value creation from manufacturing and around 15 times the total value creation from primary industries. With such an obvious dependence on oil revenues, it is interesting that Norway is known and presented as an ecological and sustainable economy. Behind the breathtaking views of the fjords, clean electricity generated from 99% hydropower, and a developed recycling culture, Norway is quietly laying oil pumps and delivering fresh oil from the North Sea continental shelf.

Historical and expected crude oil production in Norway, 1970-2021

Source: Norwegian Petroleum Directorate 2017

Crude Economy and Politics

Norway derives much of its modern-day economic growth and well-known welfare system from its oil and gas industry, rather than its tax system, migrant policy or union labour negotiations, as many “Norwegian model” supporters claim to be the case. However, this over-reliance on one sector has made Norway unconsciously fall into crude dependence. The oil dependence was a major cross point during the recent elections where conservative Prime Minister, Erna Solberg, and her well-equipped rightwing coalition government defeated the centre-left opposition party by the narrowest of margins, mainly with rich promises for steady management of the heavily oil-dependent economy.

Solberg’s government had led the country through the severe collapse in crude oil prices in 2014 and again pledged further tax cuts, a continuation of oil investments and responsible management of the Norway’s $1trn sovereign wealth fund. But Solberg’s economic plans are increasingly becoming more of a problem than a solution. Her party will have to fight against Norway’s Green Party, which has strong intentions to scale back the country’s oil industry and has gained supporters in the task for stopping Norway arctic oil field developments. More than 65% of Norway’s undiscovered oil supplies are off its northern coast in the Barents Sea, and for the Norway’s petroleum industry, access to these fields is crucial, if Norway wants to sustain its wealth. Just recently, Norwegian giant Statoil started to assess which of the 90 exploration blocks in the Barents it wants to bid for and it is likely a record number of Arctic wells are due to be drilled there this year if Solberg’s government continue with its initial plans.

It is no secret that huge oil incomes combined with a relatively small population are generally leading to high levels of government savings. Proving that, Norway’s sovereign fund jumped over the $1trn valuation mark recently. Today, theoretically, as some Norwegians like to point out, each of the country’s 5.3m citizens has a slice of the fund worth approximately $190,000. The fund is intended to continue to finance Norway’s rich welfare system when the oil wells one day run dry. Until then, the government is allowed to withdraw only the equivalent of the fund’s expected annual returns, which was recently revised down from 4% to 3%.

The fund is recognised to be amongst the world’s biggest investors in equities, possessing around $668bn worth of shares in over 9,000 companies globally. Norwegians can proudly say that they own 1.3% of all listed companies worldwide. However, the fund’s great size has made it a challenge to find markets and assets big enough to absorb this size of investments. Not only are markets scared of the size of the fund, Norwegian politicians are finding it hard to resist their constant temptation to redirect oil savings to cover their budgets.

Investment Areas of Norwegian Pension Fund

 

Source: Norges Bank Investment Management Report 2017

Unrefined Imbalances

The emergence of Norway as an oil-exporting country has raised a number of issues for Norwegian economic and social policies. As oil prices have collapsed recently, it is clear that Norway has caught what used to be recognised in economic theories as “Dutch disease”: an over-dependence on one industry, in this case, the oil and gas sector.  The severe oil price slump since 2014 is a reminder that Norway’s uncontrolled exposure to external risks must be mitigated by a flexible and competitive mainland economy with a dynamic and technologically advanced labour force.

Even though unemployment is at a record low at 4.8%, the country itself has an under-utilised and underemployed workforce structure with large inefficiencies. Today many Norwegians live off the generous benefits that are derived from high taxes and oil wealth and, as such, a sizeable part of the workforce is indeed employed but work hours are not closely comparable with those of other first-world countries. All of this exposes this Scandinavian model economy to continue to be largely dependent on oil extraction and exports when it is ultimately time to start looking for ways to industrialise or make the economy smarter.

Securing the Future

Norway has a number of oil developments that will be launched in early 2019. Named after their famous politician, the Johan Sverdrup oil field is one of the five largest oil fields on the Norwegian continental shelf. With an expected yield of 2-3bn barrels of oil, it is one of the most important industrial projects in Norway over the next 50 years. The development and operation of this enormous project will generate revenues and provide jobs for the coming generations, ultimately supplying the Scandinavian model with more fuel for growth. According to estimates, peak production will constitute around 25% of all Norwegian petroleum production. Total revenues from production are calculated to be $17b3bn over 50 years with estimated corporation tax paid to the Norwegian state of around $85bn. Daily production during the first phase is planned at 440,000 barrels per day, reaching peak production at around 660,000 barrels daily.

The only “green” thing about this story is that the field will be operated by electrical power generated onshore. Sadly, until the abundance of crude oil in the Scandinavian region is exhausted, it will continue to be the only viable fuel for the Norwegian economic model.

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Brexit

Brexit Deal Gives Trade Talks the Go-ahead

 2 min read / 

Brexit Deal

The Story

The UK has reached a deal on three contentious issues which have prevented negotiations moving on to trade. The deal ensures no “hard border” between Northern Ireland and the Republic of Ireland, that the rights of EU and UK citizens be protected irrespective of whether they live in the UK or EU post-Brexit and commits the UK to a divorce bill settlement estimated to cost between £35bn and £39bn. EU Commission President Jean-Claude Juncker called the deal “the breakthrough we needed.”

Why It’s Important

“Theresa May has achieved what she wanted – the green light to move on,” said the BBC’s Political Editor Laura Kuenssberg. Britain plans to leave the EU at the end of March 2019, yet trade has not been discussed. May will now be able to negotiate on trade and a transition deal, providing businesses with greater clarity over the regulation. However, the entire basis for UK-EU relations is still to be discussed.

“We all know that breaking up is hard but breaking up and building a new relation is much harder.”

European Council President Donald Tusk

The EU plan to offer Britain a Canada-style trade deal, which would impose new tariffs on trade, a document leaked last month revealed. Trade negotiations are expected to be tough and could take several years. The importance of reaching a clear transitionary framework will be vital for businesses, and a lack of clarity may deter businesses from investing in the UK.

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Europe

Irish Border Deal Falls Through

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Irish Border

Following rumours that consensus had been reached, the DUP’s objection caused it to fall through.

Yesterday, senior officials said that “regulatory alignment” has been achieved on the issue of the post-Brexit Irish border. However, while this appeased Ireland, Northern Ireland’s DUP rejected draft proposals – despite Theresa May personally phoning DUP leader Arlene Foster. Given that the Conservatives owe their working parliamentary majority to the co-operation of the DUP, the latter wields significant power in the ongoing Brexit negotiations. The collapse of the deal comes just days before the December EU summit and therefore reduces the time available for the member states to outline their proposals for the union’s future relationship with the UK.

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Europe

UK Assault Ships Face the Axe

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UK Assault Ships

 

 

The Royal Navy may cut key strategic warships in order to plug a £20bn black hole in funding.

Gavin Williamson, the UK’s new defence secretary, may have to axe HMS Bulwark and HMS Albion, Britain’s two amphibious assault ships. Presently, the UK and France are the only two nations in Western Europe with the capacity to conduct large-scale amphibious assaults on enemy territory. As such, the possibility of the UK scrapping this capability has prompted worry among its NATO allies. The US has said that the removal of the UK’s amphibious ships would strongly impact America’s strategy in Europe while also strengthening the hand of NATO’s opponents.

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