Norway’s new reality sets in

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NEWS ANALYSIS: As government leaders scurried from one state budget crisis meeting to another heading into the weekend, Norway’s oil- and oil-related companies have been dealing with crises that are much more direct, and painful. One of Norway’s top political commentators helped put things in perspective just ahead of the government’s D-Day over the budget on Monday.

Sharply reduced investment in the oil industry has cut demand for the drilling solutions offered by companies like National Oilwell Varco, which announced major layoffs in Norway on Wednesday. PHOTO: NOV

The light’s fading on Norway’s oil and offshore industry, with the latter being particularly hit hard. New sources of revenues will need to fund the country’s welfare state in the future. PHOTO: NOV

Kjetil B Alstadheim, the award-winning political editor of newspaper Dagens Næringsliv (DN), started off DN‘s weekly Saturday commentary by quoting rock star Iggy Popp:

We’re gonna play a game that’s funny,
Get the, get the, get the money

That’s what it’s all about in Norway right now, as politicians and businesses alike scramble to find new sources of money to replace dwindling revenues from Norway’s oil industry. It has been a huge source of wealth that Norwegian officials arguably have used much more prudently than many other oil nations. It’s now time, though, to realize that money isn’t likely to gush out of the North Sea or other more controversial offshore areas in the Arctic for much longer. This year’s proposed state budget is expected to be the last in which the government can dip as deeply as it has into the so-called Oil Fund, Norway’s huge sovereign wealth fund where successive governments have stashed oil revenues since the mid-1990s.

Sobering figures from the Finance Ministry
Alstadheim noted that in the midst of last week’s budget chaos, which seriously threatened to topple the government, a brand new report from the Finance Ministry was sent to Parliament. It showed the latest figures for the state’s oil revenue this year, and “that’s where the real budget crisis lies,” Alstadheim wrote.

In 2014, the state’s revenue from the oil industry amounted to NOK 312 billion (USD 37 billion), he noted. After oil prices fell, Prime Minister Erna Solberg’s conservative government braced itself for a major decline but still expected that NOK 204 billion would be pumped into the state treasury this year.

In reality, the figure is now set at NOK 121 billion. That means the state’s most important source of revenue has fallen by more than 60 percent in just two years. Even after last week’s historic OPEC agreement that boosted oil prices, also for a non-OPEC member like Norway, few if any think oil prices will return to their historic highs of more than USD 100 a barrel.

Much was made of the fact that Finance Minister Siv Jensen, for the first time ever, was taking more money out of the Oil Fund this year than what was coming in from the North Sea, but the actual difference was expected to be “only” NOK 3.7 billion. Now, given the decline in new revenue, it will amount to nearly NOK 91 billion.

That doesn’t mean the Oil Fund is actually being tapped, as Alstadheim pointed out, because it’s so big that it’s generating lots of money on its own investments. But it’s cause for pause, and underlines the importance of economic diversification in a country where oil and gas have dominated for decades.

Unavoidable ‘green shift’ ahead
The consequences of both the decline of oil revenues caused by lower oil prices and the looming decline caused by climate concerns and less demand for fossil fuels can be brutal for the Norwegian economy. Tens of thousands of jobs have already disappeared in Norway and many oil service companies are facing bankruptcy. Even though state statistics bureau SSB expects oil prices to rise and that the industry will turn around by 2020, no one expects all the jobs to return. That’s because many other businesses are struggling as well, from hotels and restaurants in Norway’s oil capital of Stavanger to companies that relied on affluent oil workers including, Alstadheim noted, a firm that offered training in mountain climbing techniques to oil rig workers who needed some sports activity. Its revenues fell in line with oil prices, as the workers’ employers cut back on such benefits.

The mountain-climbing company, Åndalsnes-based Aak Group, has found new customers in the alternative energy sector, but at much lower prices. It illustrates, perhaps, how Norwegian entrepreneurs need to adjust to a new reality, where the money won’t flow in such large amounts, but it can be found.

As the state budget crisis continued on Saturday, there were reports that the politicians involved would announce a solution before Monday, when Solberg otherwise would need to ask for a vote of confidence in the Parliament. They did so, after a budget breakthrough Saturday evening that saved Solberg’s government from collapse. The new budget included nearly NOK 3 billion worth of extra climate measures that finally satisfied the government’s two more environmentally oriented support parties.

Meanwhile, a much-hyped “green shift” for Norway’s economy is unavoidable. It won’t generate as much revenue as the oil industry has, but new “greener” sources of revenue to replace oil will be critical in the long run. Alstadheim noted that the current “budget crisis” will subside, but Norway’s real long-term budget crisis will loom for years ahead. Berglund

  • frenk

    This is an entirely unnecessary and ‘self-created’ budget crisis.

    • inquisitor

      I remember when the oil prices first started to fall in mid-2014 and there were articles posted here on this site mentioning these industry experts talking about their optimism on how it was just going to be a short-term problem and prices would at worst level off or would rise again.

      I immediately commented on how they were so wrong and apparently do not see the disaster that is coming for the price of oil and the industry itself. The situation for the oil industry is dire. It is going to drop like a stone and stay down for a long while. Hopefully the industry hasn’t leveraged itself too much in the hopes of a bright future of production at high oil prices and hopefully they haven’t been gambling with exuberant hedging bets. Because I would assume that is exactly what they have done.

      Realistically, the price of oil is usually not based upon true supply an demand. Minds much greater than my own have informed me that true supply and demand of oil with no external manipulative factors artificially influencing its price and with all major producers globally producing freely is no more than $15-20 a barrel.

      In November 1998 oil was just over $16 a barrel and did phenomenally well overall until June 2014. A good 16 year run.
      It was under $30 January 2016 and two days ago just over $50

      Thing is, there is plenty of oil being produced. Prices will do down even further. I would not be surprised to see oil go down to $20 or even $10 a barrel in the next year or two as a low. It may fluctuate here and there but the price of oil is going to remain low for a long time unless external manipulations occur that affect normal supply and drive it back up. Peacetime will work against oil and war is about all that will help profits in this regard.
      Climate concerns and “going green” is all nonsensical rubbish and will further destroy the oil industry. Everyone is producing oil and that is why the price is low, not because everyone has embraced green alternatives and is now producing less and thus demand is now also low.

      With this drop in oil, I would expect gold to drop and I would even dare say under $500/ounce, even $300.
      America this upcoming year or the next will suffer its next financial hit similar to 2008 banking crisis and another residential and commercial real estate debt crisis. But this time, no money is there for bailouts. Look to Wells Fargo malfeasance to be in the news in this regard.