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Wednesday, July 17, 2024

Krone falls again along with oil prices

Norway’s krone has weakened once again in line with another fall in oil prices. The new signals of economic unrest also set off a new round of political quarreling, but not all offshore companies are complaining.

Norway's krone sunk along with oil prices again this week, but that's at least helping some exporters. PHOTO:
Norway’s krone continued to sink along with oil prices again this week, but that’s at least helping some exporters. PHOTO:

As the price of Norway’s North Sea crude oil dipped below the USD 50 mark, the value of the country’s currency sunk as well. On Tuesday morning it was costing NOK 8.24 to buy a US dollar, a highly unfavourable exchange rate for Norwegians on holiday abroad and a sign that prices for imported goods will rise again. The Norwegian krone has fluctuated widely and in different directions against other currencies all summer, but the past several years of an extremely strong krone appear to be over.

The recent fall in oil prices has also set off new demands for the government to do more to help Norway’s suddenly beleaguered oil and offshore industry. Prime Minister Erna Solberg, who just launched her Conservative Party’s campaign in the run-up to municipal elections September 14, is facing pressure from a former political rival at the opposition Labour Party, Karl Eirik Schjøtt-Pedersen. He was chief of staff for former Prime Minister Jens Stoltenberg but lost his political top job when Labour lost the last national election. Now he’s the chief lobbyist for Norway’s oil and gas industry, as new managing director for industry trade association Norsk Olje og gass, and he called on Solberg over the weekend to offer tax relief to the industry.

Great expectations
“We expect the government to follow up on the point in their own platform about changes in the petroleum tax system, which can increase the degree of oil extraction,” Schjøtt-Pedersen told newspaper Dagbladet when Solberg was in Bodø over the weekend. The oil industry believes that changes in the tax system could spur projects that now may be unprofitable, given low oil prices, but are important for the economy because of the jobs they’d create.

Veteran Labour politician-turned-oil-lobbyist Karl Eirik Schjøtt-Pedersen is calling for more help for the oil industry. PHOTO: Arbeiderpartiet
Veteran Labour politician-turned-oil-lobbyist Karl Eirik Schjøtt-Pedersen is calling for more help for the oil industry. PHOTO: Arbeiderpartiet

Schjøtt-Pedersen’s own former Labour-led government reduced support for oil field development costs from 93 to 89.3 percent, Dagbladet noted. Solberg’s Conservatives-led government promised to reevaluate that change and others in the tax system, to increase oil and gas production. Now she’s asking Schjøtt-Pedersen to be patient, claiming the oil and gas tax system must be “stable and predictable.”

Critics say the Labour Party, meanwhile, has long had an unpredictable outlook on the oil industry. It’s happy for the jobs that oil and gas production can create, and worried about the current decline, while it also tries to maintain an environmentally conscious profile. Labour’s new leader, Jonas Gahr Støre, hasn’t seemed inclined to give his former party colleague Schjøtt-Pedersen much help, even musing out loud last summer over whether much of Norway’s untapped oil reserves should be left under the seabed, for the sake of the environment and to help fight climate change.

Støre also caught criticism this week from political rivals in the Progress Party, which shares government power with Solberg’s Conservatives. The Progress Party’s parliamentary leader Harald Tom Nesvik accused Støre of wavering on oil policy, telling newspaper Dagens Næringsliv (DN) that  Støre was creating uncertainty and unpredictability for an industry that’s plagued by falling oil prices and layoffs. “It puts Norwegian jobs in danger when he (Støre) comes out with various positions on various issues,” Nesvik told DN. Støre responded that Nesvik’s own government “hasn’t done much to help the situation that has occurred, and seems more inclined to criticize us.”

Weaker krone has its strengths
Meanwhile, at the oil service company Aarbakke in Rogaland, the fall in the Norwegian krone caused by the fall in oil prices is actually helping it win business abroad. Inge Brigt Aarbakke concedes that “times are tough,” with 30 employees furloughed because of the oil price collapse. He told DN it could have been worse, though, because the weak krone makes it more attractive and affordable for foreign oil firms to hire Norwegian suppliers. Orders come in US dollars, and with one US dollar now worth more than NOK 8, Aarbakke is suddenly more competitive: “Since last summer, the dollar has improved 33 percent in our favour and the British pound by 22 percent,” Aarbakke told DN. One of his colleagues is now working on a subsea project off the coast of West Africa, on a job priced in US dollars that buy far more kroner.

“Without this exchange rate, we would have had to lay off another 70 people,” Aarbakke told DN. His company now has 320 employees and expects to generate NOK 650 million revenues this year, down from NOK 800 million last year.

Companies exporting goods and services abroad, like Aarbakke, have reason to hope for continued weakness in the Norwegian krone, according to currency analyst Magne Østnor at Norway’s biggest bank, DNB. “Even though we think the krone will strengthen, it will still be weaker than it has been historically, and weaker than what many companies have expected,” Østnor told DN, stressing how that helps Norwegian exporters.

The exchange rate also takes some of the sting out of the lower prices for oil exports: A barrel of North Sea crude that sold for USD 100 last year generated around NOK 600 because of exchange rates at the time. Now a barrel of North Sea crude priced at USD 50 doesn’t generate half of that, at NOK 300, but rather USD 410, because of the current USD/NOK exchange rates.

Even though Østnor thinks the kroner has weakened too much, since Norway’s economy remains relatively strong, he thinks the krone is mostly functioning as it should. “And we should be glad about that,” because of the relief the exchange rate can offer, he told DN. Berglund



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