Sunday, 24 April 2016 06:32

Focus Norway Edition: Impact Of Lower Oil Prices On The Norwegian Economy

Rate this item
(0 votes)

In my first article on Focus Norway Edition, I had used two charts to explain the importance of the oil and gas sector for the Norwegian economy. This article digs further into available data to show the impact lower oil prices are having on the Norwegian economy. While I am not implying gloom and doom for the Norwegian economy if oil prices remain low, the government sector is certain to face budget limitations on any sustained depression in oil prices.

A single chart below will put things into perspective and it gives Norway’s share of GDP, investments, exports and state revenue from the petroleum sector.

 

Norwegian Petroleum Sector Share Of GDP Investments And Exports

 

Norway’s share of GDP from the petroleum sector peaked out at 25% in 2008 and was at 22% in 2012. However, with the decline in oil & gas prices, the contribution to Norway’s GDP from the petroleum sector has slipped to 15% for 2015.

As I mentioned above, the government sector is likely to face budget limitations due to decline in energy prices and my point is backed by the fact that the share of state revenue from the petroleum sector was 33% in 2012 and has slumped to 20% in 2015.

At the same time, I must again emphasize on the point that I am not painting a gloom and doom scenario and my point is backed by the second chart below that gives the “Government Pension Fund Global.”

 

Norwegian Government Pension Fund Market Value As Percent Of GDP

 

Government revenues from petroleum activities are transferred to the Government Pension Fund Global, which has value of NOK7.0 billion as of 2015. The fiscal rule provides for petroleum revenue spending to be increased in bad times and decreased in good times. Therefore, even in sustained downturn for energy prices, the pension fund global acts as a potential back-up, but the government would certainly want to avoid fund value erosion.

Coming back to the first chart, Norway’s share of investment in the energy sector was 29% in 2014 and declined to 26% in 2015. While the decline has not been very significant, I expect further decline in investments in 2016 and potentially in 2017 if oil remains largely sideways to lower. However, with oil trending higher even after failed Doha deal, there are reasons to be optimistic.

In conclusion, the petroleum sector is one of the key drivers of Norwegian GDP and government revenues. While the country’s funds provide strong buffer for challenging times and ensures that the economy remains stable, higher oil prices are critical for investment growth and a stable employment profile.

Read 801 times

Leave a comment

Make sure you enter all the required information, indicated by an asterisk (*). HTML code is not allowed.