Oil Wealth and the Future of Norwegian Economic Growth

How does Norway's economic growth model depend on its oil wealth, and how will the decreasing price of oil affect the country's future outlook? In order to clearly answer this question, research must be conducted to provide answers to this multi-faceted proposition. This Scandinavian country engenders its own particular policies in the realm of government intervention within the economy, especially in the form of expensive taxes. Understanding how these artificial levers currently affect the oil industry must play a role in grasping the overall economic growth model. With the Norwegian reputation for high educational standards, an in-depth consideration of how this contributes to national values will allow us to view government policies constructed in the interest of the public good. Finally, the question at hand requires a clear understanding of the petroleum industry and its role in the Norwegian market. Without these three facets studying the role of government, society, and economics on the prosperity of the petroleum industry, difficulties will arise in measuring the nuanced relationship between Norway's growth model and its oil wealth.

Policymakers face some important decisions in Norway's future; the proposed study may lend some clarity to important upcoming decisions. Specifically, political leaders must consider global energy trends as they evolve towards more environmentally favorable methods away from the oil industry. Technological trends point to a greater role in the use of renewable energy through the implementation of wind farms, hydroelectric dams, and solar panels. Such methods, while currently dwarfed in terms of efficiency and output, stand ready to overtake more conventional energy methods emitting greenhouse gases as governments clamor to stem rising tides set in motion by global warming. Questions policymakers may face include an assessment of Norway's forecasted economic future. Will future Norwegian generations benefit from the economic success of the present, or will the intergenerational transmission of success begin to regress? Will Norway face economic realities forcing it to spend its oil money? Could such a scenario be averted? How will the globalization of energy resources affect Norway's future economic growth? By examining current and future trends related to the Norwegian economy and the future of oil on the international front, policymakers can generate effective measures by which to plan for as yet unrealized developments.

This research will contribute to the growth of scientific knowledge by allowing policymakers to make educated assertions concerning the development of the oil industry. Scientific knowledge will be compiled and processed in an effort to more clearly understand economic roles and models, especially as they affect the economic development of Norway. In the context of growth, however, an enlargement of scientific knowledge will remain limited. The objective of this study endeavors to synthesize already existing data in order to effectively address future trends, not influence the funding of new scientific knowledge for increased comprehension of the subject. In this case, the researcher assumes that adequate source material already exists for answering the previously discussed questions.

As stated at the beginning of this discussion, this research will define exactly how Norway's economic growth model depends on its oil wealth and how the decreasing price of oil will affect the country's future outlook. The goal of this study seeks to understand the petroleum market in a global context especially in the face of shifting energy preferences. Applied to Norway, we must first clearly understand how the country's industrial structure is organized. Secondly, there must be an advanced briefing on how government regulation affects current outcomes. Finally, the historic and current status of Norway's Oil Fund will be examined and analyzed. With its strong institutional structure, the country must stand ready to confront the upcoming challenges of the twenty-first century.

Bibliography

Clark, Gordon L. Sovereign wealth funds: legitimacy, governance, and global power. Princeton, New Jersey: Princeton University Press, 2013.

Clark's book offers an entire chapter dedicated to the examination of Norway's Government Pension Fund within the Ethics of Global Investment. It describes the internal workings of the fund hierarchy of control and the nature of its investments, all of which are required to seek growth opportunities outside of Norway.

Clark also goes into intricate details describing the structure, control, and accountability of the Norwegian system. It describes a National Insurance Scheme built to focus on long-term strategies for the expenditure of government oil revenues.

Clark's publication informs the selected research topic and question by giving us a clear structure for grasping the means by which Norway's oil revenues are capitalized on. His expert knowledge of the variations within corporate governance and the design of investment mechanisms leaves him firmly positioned to contribute to this research.

Ric, Rus. Norway Country Study Guide Strategic Information and Developments. Washington D.C.: International Business Publications, 2012.

This IBP study makes a state-of-the-art profile of Norwegian economic development accompanied by lengthy commentary about petroleum and post-industrialism beginning with the discovery of North Sea oil in the late 1960s. The study gives authoritative leverage to the value of this commodity within the overall economy.

In addition, the study highlights efforts towards sustained economic growth followed by an assessment of the investment and business climate. With a detailed energy profile, outline of tax regulations, and a description of the education system, the work provides a powerful briefing for understanding the Norwegian culture and infrastructure.

This publication informs the selected research topic by allowing us to examine oil's contribution to the national economy both today and its history. Furthermore, by highlighting educational and cultural data, the researcher gains a complete picture by which it may understand Norway's national values.

Barro, Robert J. Macroeconomics: a modern approach, Robert J. Barro, 1st edition. Mason, OH: Thomson Higher Education, 2008.

On pages 52-53, Barro addresses in detail the concepts engendered in the Solow Growth Model along with its intellectual origin. Barro contends that in order to propose a valid theory of economic growth, one must take growth rates of technology, capital, and labor into account.

Barro describes this theory using advanced calculus figures in a step-by-step process that allows for systematic tracking of the process of the equation to its ultimate conclusion, the growth rate of real GDP per worker.

This source will serve as a technical foundation from which the researcher may apply the Solow Model in their current research of economic development in Norway. Coupled with the IBP data, the results will provide an econometric model for national growth.

Simmons, Matthew R. Twilight in the desert: the coming Saudi oil shock and the world economy. Hoboken, NJ: John Wiley & Sons, 2005.

Although this book addresses the petroleum history of Saudi Arabia, Simmons devotes the twelfth chapter to casting doubt on existing oil reserve claims. In it, Simmons questions how much may be actually claimable and the role price plays in speculation.

Simmons highlights the global problem of estimating oil reserves, especially in light of past massive downgrades to proven reserves. In spite of advancing testing technology, the only proven method for finding veritable oil solutions lies in drilling and testing.

As Saudi Arabia stands as the world market leader, its advancements and predicaments affect the global economy and especially the price of a barrel of oil. Simmons also discusses the possibilities of steep declines in giant oilfield production in the North Sea.

Bergsten, C. Fred. The United States and the world economy foreign economic policy for the next decade. Washington, DC: Institute for International Economics, 2005.

Bergsten addresses the impact of US economic growth, the world's largest oil consumer, on various oil price scenarios including the Nigerian oil impact, pointing out that high gas prices in the spring and summer raise prices. He suggests that the global community would benefit from lower oil prices, a statement in direct conflict of Norwegian policy considerations.

As such, Bergsten also points out that raising oil prices have come about as a result of intimidation. As OPEC member nations meet often to adjust their combined outputs, they also have coerced Norway into adopting policies that cut production.

This study observes the US role in price setting as a global leader and the part Norway plays in providing its service to the global market. Understanding price-setting factors coupled with the cost of obtaining a barrel in the North Sea will directly affect the profitability of Norway's Government Pension Fund.

Hamilton, James D. "Understanding Crude Oil Prices." National Bureau of Economic Research. http://www.nber.org/papers/w14492 (accessed February 26, 2014).

Hamilton notes that oil prices are controlled in terms of statistical regularities. Those results are enduring, challenging to foresee, and regulated by world leaders with contrasting viewpoints. Demand elasticity is less than one and countries need oil.

Hamilton also examines the role of an OPEC monopoly in price setting. A scarcity rent also comes into play, a concept where producers hold onto their oil and wait to sell it when supply diminishes in a more favorable market.

These kinds of trends described with a little bit of algebraic theory, help to understand the geopolitical conditions surrounding the price setting of oil in the global market. With the uncertainty of future conditions, the result implies that Norway's GPF has peaked.

Amineh, Mehdi Parvizi. Secure oil and alternative energy the geopolitics of energy paths of China and the European Union. Leiden, Netherlands: Brill, 2012.

Amineh addresses the issue of renewable energy within the European Union, highlighting efforts towards the creation of an energy market exclusively open to European countries. This effort aims to promote the free movement of renewable energy between borders.

However, the current energy transport system does not support the transfer of these resources from one point to another. As such, Amineh contends that the remaining high cost of renewable energy will make it tough to compete with oil until at least 2020 / 2030.

Amineh's argument is important because it provides a five to twenty-five-year window of opportunity for the Norwegian market to maximize its profits in petroleum energy until the renewable competition begins to lessen its significance in the market.

Bjørke, Sven Åke. "What If the Norwegian Oil Economy Is a Bubble? - Our World." Our World. http://ourworld.unu.edu/en/what-if-the-norwegian-oil-economy-is-a-bubble (accessed February 26, 2014).

Bjørke, a senior consultant at the University of Agder, believes Norway stands its economy on a single petroleum tenet that is rapidly weakening in a global movement towards green energy. He criticizes Statoil for policies that merely extend the petroleum status quo.

He proposes that oil revenues must be used to diversify the economy and use the wealth of the moment to herald the entry of a new economy where renewable energy plays a primary role. Politicians may have short-term interests, but the issue remains long term.

Bjørke's viewpoint summarizes the concerns of this research proposal. Norway depends singularly on its oil industry for generating capital, a process that leaves it exposed to massive upcoming changes intended to mitigate the effects of global warming.

Literature Review

Norway's economic growth model indicates a dependence on seeking foreign engagement strategies. The results of Government Pension Fund revenue are used to plan long-term utilization tactics that will make efficient use of the current surplus.1 Indeed, the IBP study confirms that Norway currently exports $2 billion more than it imports. This study validates the high taxation rates of the country and its outstanding level of literacy among citizens contributing to a highly developed social structure.2 The directives governing the use of the GPF and the statistics highlighting the functioning of the social system provide a clear snapshot of the current Norwegian model. In an effort to measure the potential for future growth rates, analysts can compute existing figures by employing the Solow model.3 Such a formula indicates a possible tapering of national revenue over time.

In the global market, there exists much uncertainty. Simmons is positively bearish on the oil market and the ability of professional geologists to accurately measure existing reserves. Although his studies center around famous Saudi Arabian fields, he also observes that once the North Sea oil fields peak there will likely be a sharp decline (if it has not begun already).4 After that happens, no amount of price setting and collusion with OPEC countries will save Norway from a decline in revenue although prices will certainly rise as supply decreases in the face of inelastic demand.5 Whatever the case, changes seem to lie on the near horizon for Norway.

The way oil prices are set helps to more clearly understand the conditions surrounding Norway's revenue generation. Hamilton observes environments with consistent statistical regularities that, nevertheless, converge with unstable leadership with conflicts of interest for price setting.6 Americans may prefer low oil prices, for example, but oil-producing countries need high prices to compensate for the increasing cost of the technology used to extract oil resources that are becoming increasingly more difficult to obtain. The research of Amineh looks at changing oil costs in relation to clean energy developments and projects a specific window of time anticipating when this developing sector will begin to directly compete with petroleum energy costs.7 It appears that Norway's days of steady to addition to the GPF are numbered.

When this day arrives, oil countries unprepared to transition into the green energy age will suffer. Norwegian thinkers like Bjørke are already calling for greater diversification where each citizen, alongside the use of modern comforts and technologies, manages to find a self-sustaining lifestyle through the use of robotics, green architecture, eco-friendly processing, and other developed world strategies.8 Bjørke also calls for a political hike on processes that seemingly turn a blind eye to the realities of global warming through the creation of oil-friendly policies.9 A marked contrast exists between the state needs to grow and prosper the economy in the face of an unsustainable reality. Politicians must answer the call to think beyond the immediate duration of their tenure and consider actions to work towards a brighter tomorrow for the next generation of Norwegians.

Endnotes

1. Gordon L. Clark Sovereign wealth funds: legitimacy, governance, and global power. Princeton, New Jersey: Princeton University Press, 2013.

2. Rus Ric. Norway Country Study Guide Strategic Information and Developments. Washington D.C.: International Business Publications, 2012.

3. Robert J. Barro. Macroeconomics: a modern approach, Robert J. Barro, 1st edition. Mason, OH: Thomson Higher Education, 2008.

4. Matthew R. Simmons. Twilight in the desert: the coming Saudi oil shock and the world economy. Hoboken, NJ: John Wiley & Sons, 2005.

5. Fred C. Bergsten. The United States and the world economy foreign economic policy for the next decade. Washington, DC: Institute for International Economics, 2005.

6. James D. Hamilton. "Understanding Crude Oil Prices." National Bureau of Economic Research. http://www.nber.org/papers/w14492 (accessed February 26, 2014).

7. Mehdi Parvizi Amineh. Secure oil and alternative energy the geopolitics of energy paths of China and the European Union. Leiden, Netherlands: Brill, 2012.

8. Sven Åke Bjørke. "What If the Norwegian Oil Economy Is a Bubble? - Our World." Our World. http://ourworld.unu.edu/en/what-if-the-norwegian-oil-economy-is-a-bubble (accessed February 26, 2014).

9. Ibid.