Norway and its way out of oil

Written by Chiara Crognoletti

Being in Oslo for a semester, today I couldn’t avoid maintaining the Bocconi tradition of joining the Career Days and checking the program of the equivalent Norwegian Karrieredagen. The event that grabbed my attention was a speech by Thina Saltvedt, Chief Analyst Macro/Oil at Nordea Bank, titled “The Post-Oil Era in Norway”. I could not miss the chance to know a bit more of a place that after a month looks still quite unfamiliar to me, and maybe understand the energy dynamics of this extremely wealthy (and expensive) country.

Needless to say, falling oil prices are badly hitting Norway, which is now the biggest oil producer in Western Europe and the world’s third-largest exporter of natural gas. Stavanger, the epicenter of the Norwegian oil industry, is experiencing job losses and falling house prices. Although Norway has one of the lowest unemployment rate (4.1%), the oil industry has cut 30,000 jobs during the last year and the future doesn’t look rosy. Oil-dependent cities are putting pressure on the government, which, in turn, declares that a crisis like this was needed to rebalance Norwegian economy away from oil.

The reason for the current oil prices lies on the fact that the OPEC cartel, practically governed by Saudi Arabia, is no more willing to give away income to other countries. While declaring that their mission is to “ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry”, what these countries are actually doing is to provide an excess supply of oil to the market, thus pushing oil price down and squeezing out competitors. 

In the US, thanks to the technological progress and the little time required to make a profit after investing in oil (only 2 months), shale oil producers can still be profitable at a price of 55-60 dollars per barrel. In Norway, though, producers have higher costs and it takes longer (around 10 years) to see the revenues from an investment into the oil sector. Therefore, with falling prices, investments are reduced and this can lead to a drop in the Norwegian market share in the future.

What Thina pointed out, though, is that in the future people will basically need food and energy: but will oil be really necessary in Norway? Although people from Stavanger may disagree, the answer is no. 55% of oil is currently used in the transportation sector, which is going through major changes: Norway is the second largest market for Tesla and in 2014 Tesla’s Model S became the best-selling car in the country ever for a one-month period. Behind the success of a luxury electric vehicle whose cost base is around $100,000 in Norway, there are both the Norwegian environmentally friendly culture and the government subsidies, funded by the Norwegian oil fund. This fund, worth $850 billion, is the biggest sovereign wealth fund in the world, it has been funded with oil revenues and it will certainly play a role, should the economy continue to slow down (the government can use 4% of this fund annually). But the world is also going towards increased car sharing, growing UBER and similar companies, driverless cars and planes fueled by solar energy.

It seems this is the direction Norway has decided to take, even if it will take time to complete the technological transfer and to switch an oil economy to a green one. Certainly, the good intention is there; and to the question from the public “Which countries would you suggest for engineers?”, Thina has no doubt in saying that they should stay in Norway and contribute to the green revolution the country has in mind.

Tesla Exibition in BI Norwegian Business School, Oslo.