This article takes Norway as an example an industrial economy adjusting to an increasing volume of oil and natural gas revenues.
The term “oil producing countries” has emerged in the wake of the oil crisis of 1973. It has been used to cover the oil exporters in the Middle East, Asia, Africa, and South America. Although these countries are heterogeneous as regards their standards of living, they have in common an economic structure that is still in a preindustrial stage. In general, they lack a production structure that would enable them to spend substantial amounts of their oil revenues domestically. The situation is completely different when an industrial country is an oil producer. In this article the example of Norway is taken to discuss the problems created by the development of a crude oil and natural gas sector in a highly developed economy.
With the emergence of an offshore oil sector at the beginning of this decade, Norway has entered a new development stage. Its industrial development came at the turn of the century when its economy, previously based largely on the production of fish, timber, and iron ore, started to utilize its huge hydropower resources for the establishment of a highly capital-intensive metallurgical and chemical industry. At the same time the merchant fleet was expanded and modernized. The last two decades have been characterized by diversification of production and increasing integration into the world economy. The next decade and beyond is likely to be greatly influenced by the developments in Norway’s new offshore oil sector.
Unless technical difficulties cause delays, the volume of oil and gas production in Norway is expected to rise to some 78 million tons of crude oil equivalent in 1980, from about 9.3 million tons in 1975. By 1982, when the oil and gas fields so far explored will be producing at full capacity, total oil and gas output is expected to reach some 90 million tons of oil equivalent a year, of which about one third would be contributed by natural gas. The recoverable reserves of oil and gas’ south of the 62nd parallel (latitude 62 degrees north) are estimated at 2 to 3 billion tons of oil equivalent and’ would last until the turn of the century. If reserves north of the 62nd parallel prove to be recoverable, the production period could last much longer.
Even at its peak in the early 1980s, production is unlikely to exceed 2 per cent of estimated world petroleum output, or about 7 per cent of European oil consumption. Norway will therefore not be able to exert a significant influence on the international price of oil. The margin of oil prices over production costs is an important determinant of the duration of the Norwegian “oil era” apart from the size of the recoverable oil reserves. At present, production costs of US$5-6 a barrel in the less “expensive” oilfields in the Norwegian North Sea sector leave a comfortable margin at current market prices. Average production costs in the North Sea would, however, increase if exploitation was to extend to oilfields located in deeper waters.
The investment required to develop the new petroleum sector rose sharply from NKr 0.3 billion in 1970 to NKr 5.5 billion in 1975. Owing to its high international credit standing, the prospective large income from oil production, and the involvement of foreign oil companies, Norway was able to finance the investment fully through medium-term and long-term foreign loans. As much of the investment consisted of imported equipment, Norway’s current account deficit in this period averaged over 4 per cent of gross domestic product (GDP), well above the 1½ per cent recorded in the 1960s. About one third of the oil equipment required was produced in Norway, particularly drilling platforms, and this activity was an important expansionary force in the economy.
With the attainment of full-scale production of oil and the shift to being a net oil exporter from the latter part of 1975, Norway will substantially increase its per capita income and transform its traditional current account deficit into a large surplus during the second half of the 1970s. This surplus will be maintained even though oil revenue is likely to be used for raising the level of domestic consumption and investment; it will enable Norway to reduce its foreign indebtedness and to increase its investment abroad and its foreign aid. The oil revenue will accrue to a large extent to the Government via tax and royalty receipts as well as through government ownership of the Statoil company, thus enabling the Government to maintain control over the impact of the oil sector on the economy.