NEWS ANALYSIS: Norway’s dependency on its oil and gas industry isn’t the only thing threatening the economy. After a week of falling oil prices, state financial regulators are also sounding alarms over Norwegians’ record high household debt at a time when interest rates are due to rise.
“The household debt burden, measured in terms of debt and disposable income, is higher than ever,” economists at the state regulatory agency Finanstilsynet writes in its latest report. Even a moderate rise in interest rates, long signalled by Norway’s central bank, can have a “considerable” effect on many borrowers.
“All in all, an interest rate shock could hit households hard,” the head of the regulatory agency, Morten Baltzersen, told news burean NTB this week. He thinks Norway is even more vulnerable now than it was during the country’s bank crisis in the early 1990s, when commercial banks were merged and nationalized. That’s how the Norwegian government became the largest shareholder in the country’s biggest bank, DNB, which has recently been highly profitable.
“The degree of debt is much higher now than the last time we had a crisis nearly 30 years ago,” Baltzersen said, adding that mounting debt after years of rising housing prices is cause for concern. Similar dynamics were at work in the 1980s, when home mortgage rates were in the high teens and home prices boomed before they began falling, and bottomed out in 1992. That can happen again, regulators fear, despite higher capital demands imposed by the government.
In addition comes the consumer loan growth that already has resulted in 470,000 cases of default, up 18 percent over 2017. Even though Norway’s real estate brokers announced another slight rise in housing prices in May, and report still-strong sales, “we can experience real estate prices falling a lot over a short period,” Baltzersen said. “The banks get scared and lend less. Then folks get scared and borrow less, and that sends out ripple effects over the entire economy.”
Far too dependent on oil and gas
Norway’s economy remains strong, even “remarkably” so, according to the International Monetary Fund. It has recovered relatively quickly from the oil price collapse of 2014. Concerns remain, however, over the country’s ongoing dependency on its oil industry, at a time when fossil fuels are increasingly unpopular. Oil prices have recently fallen around 16 percent, including a surprising dive of nearly 7 percent just last Friday alone. A barrel of Norway’s North Sea crude was hovering around USD 61 on Wednesday, down from the low USD 70s in late May.
Analysts blame a trade war between the US and China, along with ample supplies in the US and lower demand because of climate concerns. While Norway’s oil industry is still gushing, with several oil service firms reporting the briskest business in 10 years, falling oil prices always spark jitters.
“I was surprised by the steep fall, even though I think anything over USD 60 is a healthy oil price,” oil service veteran Ståle Kyllingstad told newspaper Dagens Næringsliv (DN) on Monday. “Such a fast fall of nearly 10 dollars (per barrel) shows how unstable oil prices are. I think it’s a development the industry will have to get used to.”
While Kyllingstad is among those enjoying busy days in the oil business, not least because of demand for maintenance work on oil installations, many economists and media commentators think the Norwegian government suffers from “acute oil dependency,” as newspaper Aftenposten wrote recently. The government’s refusal to cut back on issuance of new exploration and production licenses at a time when it needs to also cut Norway’s still-rising carbon emissions angers and frustrates not only climate activists and environmentalists but also many economists, professors and researchers.
“We underestimate our oil dependence,” wrote Petter Osmundsen, a professor specializing in petroleum economics at the University of Stavanger, in DN earlier this spring. The real value creation from the oil business in Norwegian counties is downplayed, he contends along with Atle Blomgren, a senior researcher at the Norwegian research center Norce.
Even state statistics bureau SSB (Statistics Norway) tends to lump the value creation of the oil industry (NOK 343 billion last year) into its own offshore area, with Osmundsen and Blomgren calling that “an annual phenomenon” that excludes the value creation it fuels for geographic areas like Oslo or Akershus. There’s long been a practice of separating Norway’s mainland economy from its offshore economy, to set apart extraordinary income from a non-renewable resource. The oil business, however, plays a huge role in the economic success or failure of mainland communities, because of all the jobs it creates.
‘Gas isn’t green enough’
Concerns are also rising over future demand for Norwegian gas, which is often used as a political excuse for continuing to drill for more oil and gas. Government officials have long claimed that Europe, for example, needs Norway’s gas as an alternative to coal and Russian gas that can carry political risks. Gas is even glowingly described as an important part of Norway’s efforts to cut carbon emissions.
Norwegian officials, however, are believed to have received a cool reception to their efforts to sell more gas at a so-called “informal” meeting of EU energy ministers in Bucharest in April. Norway’s isn’t a member of the EU but was able to send a state secretary from the oil ministry to take part.
He ended up meeting several key European ministers who don’t want to become dependent on gas or invest heavily in pipelines when they can rather invest in solar and wind power instead. Gas, wrote DN commentator Kjetil B Alstadheim, simply isn’t green enough: “Norway was selling a grey shift, when the EU wants a green shift.” It’s not only about meeting the EU’s ambitious goals for cutting carbon emissions but also its energy security, and be less reliant on imported sources. “The EU will still need a lot of gas for a long while, but it’s highly uncertain how much and how long,” Alstadheim wrote.
Some analysts, including those at Rystad Energy in Oslo, have predicted that Norway’s large oil service sector won’t return to its old heights any time soon, despite the current activity. “It all depends on whether new areas (of Norway’s continental shelf) will continue to be opened, and whether that will happen in today’s political climate,” Audun Martinsen, an analysts’ chief at Rystad, told DN. “Perhaps the Norwegian shelf has already topped out.”
That fuels debate over how to best, and quickly, diversify Norway’s economy to make it less oil- and gas-dependent. Critics claim the government isn’t doing enough to find alternatives to oil, as a so-called “new oil.” Oil industry executives and lobbyists are digging in their heels, with one declaring that “there is no ‘new oil'” to replace the real thing.
The International Monetary Fund gave Norway high marks once again in its latest report, but was also concerned over the country’s high housing prices. The IMF cautioned Norwegian officials against believing that the currently strong economy will stay that way, not least because oil revenues (and likely those from as) will fall sometime in the not-too-distant future.