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By Oren Laurent
President, Banc De Binary
Spending by Norway’s oil and gas companies is expected to reach $37.3 bln in 2014, according to last week’s statement by Statistics Norway. That’s seven percent higher than last year, but project costs are rising, and profitability and investment, although currently still high, are both showing signs of decreasing. It is difficult not to question the long-term future of this oil industry and of the country whose economy is so heavily dependent on it.
In past years, Norway has lived the high life and been able to offer its citizens one the world’s most generous welfare models. The flourishing oil industry accounted for about 20% of the country’s economy, and led to competitive wages not just in the industry but across other sectors too. Norway boasted the world’s highest gross domestic product per hours worked.
But can you have too much of a good thing? Thanks to the over-inflated wages, labour productivity has been in decline since 2007, and several companies have now turned to outsourced employees and opened factories in countries like Mexico and China, in order to reduce business costs. This puts Norway in a weaker position to overcome a decline in the oil industry, a decline which looks increasingly likely.
After all, oil is a limited global resource. The most accessible oil sources were used up first and so supply costs are now rising. Oil importing countries such as Sweden, Finland and Germany have recognised the need to reduce their oil dependency and invest in renewable sources of energy. Oil will become more expensive as the alternatives become cheaper.
It is important to note that in the short-term, Norway still keeps seventh place in the list of the world’s biggest oil exporters. The industry is currently still fetching profit. Norway also supplies a fifth of the European Union’s gas, a critical role given current concerns about Russian involvement in the Ukraine and talks about sanctions which could affect Russia’s oil and gas supplies, as I discussed in this column two weeks ago.
The problem is that politics is also a short-term game. Prime Minister Erna Solberg told Fortune magazine in January that the “natural resource is not sustainable, even if it lasts for a long time. We have to survive beyond the oil age.” Solberg knows that Norway will need to raise productivity and competitiveness to stay relevant. Several company executives and politicians have voiced the opinion that the country should limit wage increases and spend less of its oil money, with some saying that it should also depreciate the currency. However, with the economy yet to face hardship, Norway’s politicians may be reluctant to push the public towards change and cutbacks.
Oil money is as much a blessing to a country’s economy as dependence is a curse. The country’s leaders are aware of the facts but will they have the conviction to do something about it?
