Paradox of plenty: Norway’s macroeconomic policy dilemmas during the oil price crash, 2014-15

Abstract

Norway, a country at the top of global rankings in terms of gross domestic product (GDP) per capita and human development was also in an enviable position with large current account and fiscal surpluses, as well as a massive stock of public assets. Then came a shock; between June 2014 and early 2016 oil prices tumbled by more than 70 percent. As a major oil exporter, Norway’s current account was severely impacted but could this actually draw Norway into a macroeconomic crisis? Couldn’t it just fund its way out of the contractionary pressures building up in the economy using its stock of foreign currency reserves being held in a sovereign wealth fund? This article explores the fiscal and monetary policy challenges that Norway faced in preempting falling GDP growth and rising unemployment while at the same time, warding off a housing bubble going bust.

Keywords:

• Norway
• fiscal policy
• monetary policy
• sectoral financial balances
• sovereign wealth funds

Notes

1 The stock being so large, the returns would suffice.

2 Mohsin, S., and Holter, M. “Norway to Start Withdrawals from Oil Fund to Plug Deficits/” Bloomberg Business, October 7, 2015. Accessed on November 3, 2015, http://www.bloomberg.com/news/articles/2015-10-06/norway-budget-proposes-boosting-oil-spending-by-14-nrk-says

3 Crouch, D. “Slowing Economy Forces Norway to dip into Oil savings.” Financial Times, October 7, 2015. Accessed November 3, 2015, https://next.ft.com/content/52860dbc-6d09-11e5-8171-ba1968cf791a

4 This includes euro, yen, and sterling pounds in addition to U.S. dollars.

5 The “resource curse” refers to the phenomenon wherein countries or regions endowed with natural resources end up with not just low rates of growth and underdevelopment but also exploitation and widespread poverty, stark inequalities, corruption and crime, pollution and environmental degradation, and so on. The Dutch Disease is more the economic consequence of exporting natural resources which leads to an appreciation of the domestic currency, inflation, increased imports and high wage costs. This ultimately destroys traditional industry and exports, making the country over-reliant on just the export of the natural resource.

6 Kim, Susanna (2014), Why Norwegians are Millionaires and Americans are Paupers, ABC News, January 11, accessed on November 2, 2015, http://abcnews.go.com/Business/norwegians-millionaires-norways-sovereign-wealth-fund/story?id=21488085

7 Poelzer, Greg (2015), What Crisis? Global Lessons from Norway for Managing Energy-Based Economies, February, Commentary, Macdonald-Laurier Institute, Canada, http://www.macdonaldlaurier.ca/files/pdf/MLICommentaryPoelzer02-15-V7-WebReady.pdf

8 Klein, Matthew (2015), How Will the Oil Crash Affect Norway? FT Alphaville, February 17, accessed on November 13, 2015, http://ftalphaville.ft.com/2015/02/17/2119329/how-will-the-oil-crash-affect-norway/

9 With the expected real rate of return on GPFG reduced from 3 percent to 4 percent, Norway’s fiscal spending would be further tightened. See OECD Economic Surveys, Norway, January 2018, accessed on June 23, 2018, https://www.oecd.org/eco/surveys/norway-2018-OECD-economic-survey-overview.pdf

10 More precisely, the government’s account in Norges Bank.

11 Figures from “Estimated Accounts 2013” have been used. Only net cash flow from petroleum activities (not accrued revenue from petroleum activities) are considered. Numbers mentioned have also been rounded off.

12 Stated in the budget report as “revenue excluding petroleum revenue.”

13 NOK 51 b = NOK 187 b + NOK 14 b – NOK 150 b.

14 The final exchange rate of NOK, however, depends on several other factors including international interest rate differential, capital flows, current account balance of mainland Norway, and so on.

15 See Footnote 11 for figures used and rounding off.

16 The argument that follows here is drawn from a post Keynesian perspective or, more specifically, Modern Money Theory (MMT). However, it is interesting to note that Norges Bank propounds a very similar view. See, for instance, Norges Bank (2011).

17 Taxes serve other important purposes like reducing inequalities, diverting resources, etc. From a monetary standpoint we do not consider them here.

18 I.e. x = (x – y) + y.

19 This is true even if the government deficit is funded through bond sales. See Juniper et al. (2013).

20 Taxes are nonetheless required as part of the non-oil budget.

21 Market Watch, “Statoil Sees Spending Cut at Johan Sverdrup Field,” January 18, 2015. Accessed on January 22, 2016, http://www.marketwatch.com/story/statoil-sees-spending-cut-at-johan-sverdrup-field-2016-01-18

22 Mohsin, S. and Holter, M., “Norway Faces 20% Drop in Oil Investment after Prices Slump,” Bloomberg Business, November 24, 2015. Accessed on November 27, http://www.bloomberg.com/news/articles/2015-11-24/norway-oil-companies-to-deepen-spending-cuts-amid-sub-50-crude

23 Planet Energy, “Norway Declares Crisis in Oil Industry as Devaluation Continues,” January 18, 2016. Accessed on January 24, http://planetenergynews.com/2016/01/18/norway-declares-crisis-in-oil-industry-as-devaluation-continues/

24 Focus Economics, GDP in Norway, n.d., https://www.focus-economics.com/country-indicator/norway/gdp

25 Durden, T., “Norway Pushes Panic Button: ‘We're in a Crisis Now, We Can't Deny That,’", Zero Hedge, January 15, 2016. Accessed on January 22, 2016, http://www.zerohedge.com/news/2016-01-15/norway-pushes-panic-button-were-crisis-now-we-cant-deny

26 Pandey, A., “Norwegian Krone Tumbles to 13-Year Low after Central Bank Slashes Interest Rate,” International Business Times, September 24, 2015. Accessed on November 23, http://www.ibtimes.com/norwegian-krone-tumbles-13-year-low-after-central-bank-slashes-interest-rate-2111914

27 A depreciating NOK would reduce labor cost in dollar terms.

28 Norway’s News in English, “Krone Falls on Interest Rate Cut,” September 24, 2015. Accessed on November 25, 2015, http://www.newsinenglish.no/2015/09/24/krone-falls-on-interest-rate-cut/

29 Milne, R., “Norway Cuts Interest Rates to Record Low,” Financial Times, June 18, 2015. Accessed on November 20, 2015, http://www.ft.com/cms/s/0/4802d964-1599-11e5-8e6a-00144feabdc0.html#axzz3xgeOLj4P. The economist quoted was Hilde Bjørnland of BI Business School in Oslo, Norway.

30 The literature on endogenous money theory is extensive. It has now been endorsed by the Bank of England. A recent study by Michael McLeay et al. (2014) provides a useful summary.

31 This will work only in cashless economy, else people may hoard cash.

32 Deposit rates are –0.3 percent presently. See Blackstone, B., “ECB Cuts Rates, Announces Stimulus to Combat Low Inflation,” Wall Street Journal, September 4, 20014. Accessed on December 2, 2015, http://www.wsj.com/articles/ecb-cuts-interest-rates-in-surprise-move-1409832304

33 Sunday Morning Herald (2015), Norway Cuts Rates to Cope with 'New Era for the Economy', September 25, accessed on December 12, 2015, http://www.smh.com.au/business/markets/norway-cuts-rates-to-cope-with-new-era-for-the-economy-20150925-gjures.html

34 Norway’s News in English (2015), Norges Bank: No Rate Interest Cut, November 5, accessed on December 5, 2015, https://www.newsinenglish.no/2015/11/05/norges-bank-no-interest-rate-cut/

35 Mohsin, Saleha (2015), Oil Risk Blows Up Inflation Goal as Norway Targets Krone, Bloomberg Business, September 24, accessed on December 2, 2015, http://www.bloomberg.com/news/articles/2015-09-24/oil-risk-blows-up-inflation-goal-as-norway-steps-up-currency-war

36 To reiterate, although the situation has steadily improved since then with rising oil prices we have focused attention on Norway’s policy challenges during the period of crisis.

37 Reuters (2012), IMF Cuts Norway Growth Forecast on Housing Bubble Fears, February 2, accessed on December 16, 2015, http://www.reuters.com/article/norway-imf-idUSO9E8C201B20120202

38 Weinberg, C., “In Copenhagen, Apartment Prices Jump 60% After Rates Go Negative,” Bloomberg Business, October 21, 2015. Accessed on December 24, http://www.bloomberg.com/news/articles/2015-10-21/60-house-price-surge-in-copenhagen-adds-to-bubble-drum-beat

39 Olsen quoted in Klein, M., “How Will the Oil Crash Affect Norway?” FT Alphaville, February 17, 2015. Accessed on November 13, 2015, http://ftalphaville.ft.com/2015/02/17/2119329/how-will-the-oil-crash-affect-norway/

40 Though we usually speak of imports and exports, these include goods and services, as well as nontradable items on the current account.

41 In Figures 7 and 8, a balanced government budget would mean moving along the X-axis. Only a current account surplus can ensure domestic private sector net financial asset accumulation, that is, a point on an SI line that lies below SI₀.

42 Statista, Upstream oil industry capital expenditures worldwide from 2010 to 2017, accessed on June 24, 2018, https://www.statista.com/statistics/654847/global-upstream-oil-industry-capex/