Norway's Oil Rent Sell-off
[Reprinted from Land & Liberty, Summer
The plan to privatize Norway's oil fund yields important lessons for
other countries that might be tempted to go further down that route.
It seems ironic that a subsoil resource belongs in principle to the
people should be turned into a lever Norwegian labour and capital
uneconomic. The upshot would be industrial unemployment. Is it worth
destroying Norwegian industry and reducing employment in order to
pursue the ideological goal of privatizing Norway's natural resource
Selling the North Sea oil would create an even stronger capital
inflow into the kroner than the sale of the oil itself. The sales
proceeds would increase the exchange rate so sharply as to render
Norway's export industries, tourist industry and other services
This promises to be the largest privatization of natural resources
since Russia's oil and gas grab by its oligarchs. New Zealand provides
a model scenario for what happens when neoliberal ideologues play with
a national economy.
The new prime minister has apparently failed to address two
dimensions of Norway's oil privatiazation.
First, how far will the kroner rise in price as a result of the
capital inflow? The smaller a currency is, in terms of its exports and
capital flows), the more sharply it responds to fluctuations in
foreign demand for (or sales of) its currency.
Oil plays so large a role in Norway's balance of payments that it has
pushed up the kroner to levels where a dinner already costs three or
four times as much as those of its neighbouring countries. Sale of its
pubic assets to foreigners would have an even stronger effect on the
country's exchange rate, because of the much larger magnitudes
In the booming global stock market, the price of a revenue-producing
asset is between 15 and 20 times earnings. This means that the inflow
of foreign capital into Norway may be more than ten times as strong as
the inflow of export revenues from oil exports. Unless this money is
recycled, it will push up Norway's exchange rate and price its exports
(including its tourist services) out of most markets.
Rather than being set by the "MacDonald's principle" of
relative purchasing power parity, the currency's value would be
established by the rate at which its oil company's shares exchanged
for those of other oil companies around the world. Instead of
reflecting the international price of a fast-food meal, the kroner's
value would set by the global price of the Big Seven oil companies
such as Exxon, BP, Shell, Texaco and so forth. Norwegian commodity
prices would become the "tail" wagged by the "dog"
of its stock-market securities.
The second problem concerns what Norway will do with its receipts for
the oil asset sell-off.
Adding the sales receipts to its international reserves will take the
form of investing them in U.S. Treasury bills - the new global money,
now that gold is being demonetized. In effect, Norway will join China
and Japan in using its export proceeds and capital inflows to buy U.S.
Treasury bonds from American investors. Its oil revenues thus will
finance the U.S. federal budget deficit, rather than be invested to
create Norwegian capital to replace the depletion of its oil.
Is this equitable? Has the Norwegian government made these
balance-of-payments effects sufficiently clear to the electorate that
they understand what is about to happen?
On balance, American investors will sell their Treasury-bond holding
sand buy stocks in Norway's North Sea oil assets. At present, Treasury
bonds pay a bit over 6% interest. Norway's North Sea oil assets are to
be priced to yield a higher total rate of return (earnings + capital
gains). The result will be a free transfer of revenue form the
Norwegian people (for whom the North Sea oil is supposed to represent
a public resource) to U.S., European and other foreign private
This subsidy of the U.S. Government is a consequence for a
neo-liberal Labour ideology. If Norwegians believe that private
enterprise is inherently more efficient than public enterprise, then
why shouldn't it use the proceeds to buy some enterprise more
productive than oil and gas? If it cannot identity such an enterprise
to purchase, then perhaps it should hold onto its oil revenues.
A third problem with privatizing the oil is the most serious of all.
Privatization will remove the oil-rent revenue from the government
budget. Without it, the government will have to raise revenue by
taxing Norwegian labour and capital. So while the kroner's rising
exchange rate is pricing them out of world markets, the tax shift to
labour and capital will further burden their cost position. The
government ability to tax land and natural resources will be
relinquished, and it will be boxed into burdening its labour force.
Rising unemployment will then further reduce tax revenue. This will
increase the tax burden on that portion of labour and capital that
remain employed, creating a vicious circle.
Two thousand years ago, Pliny the Elder wrote that the two greatest
curses of civilization were the discovery of silver and gold. This
statement may have been rhetorical hyperbole, but perhaps one should
now add oil and gas to the list of natural wealth that ends up
economically polarizing and impoverishing populations in regions rich
in subsoil resources.