The consequences of the Norwegian oil adventure

Journalist and author Simen Sætre calls it "petromania" – "a state of euphoria / gigantomania / insomnia with unconscious change of personality / mentality / thought pattern, as well as loss of overview / self-insight / judgment as a result of extraordinary hydrocarbon income, linked to petro-states in the boom" . Setter's book Petromania tells the story of a number of oil states that have, without exception, ended up with troubled economies and social problems as a result of great oil wealth. The problem is "too much of a good thing" – that is, large assets are managed by a single management environment.

In Norway, this is done by politicians and the central bank through the Government Pension Fund Global (the Norwegian Oil Fund). The result of this centralized form of governance is often referred to as a "declining rate of return" regime. The larger and more extensive the Oil Fund becomes, the worse the return we get. This is because the state power and the Norwegian Oil Fund use rational small-scale logic on a large-scale problem. A too large and centrally controlled environment simply fails to manage it all in a sensible way. Finally, it goes as it does with all major public projects: It ends in a financial disaster. The billion losses in the NAV are a good example. The disaster cannot be averted by well-informed and smart people, because it is always the same smart people who cause the disaster in the first instance.

The direct consequences for future generations of the Oil Fund can be measured fairly accurately through returns. The indirect consequences often spring from the knowledge that this large sack of money exists and can be used for social welfare reforms. It is in the same way as with Ole Brumm – yes thank you (to both).

Increased expenses. The indirect consequences are more difficult to quantify, but they are clearly visible if we look for them. Former Minister of Finance Sigbjørn Johnsen made statements to Finansavisen in early 2013 about the indirect consequences of our oil wealth. What Johnsen said was the following (commented in parentheses):

• We have a cost challenge in the Norwegian economy (out of control?).
• It is impossible to measure productivity in the public sector (system failures?).
• The Storting decided in 2005 that it is not necessary to ensure sufficient coverage for future pensions (pyramid schemes about future pensions?).
• The Norwegian welfare state today has a deficit which, without significant efficiency changes, corresponds to 8-9 per cent in increased tax revenues (bankruptcy declaration for the Norwegian welfare state?).

Sigbjørn Johnsen and the Ministry of Finance themselves drew the following conclusion: “This development will continue in the decades ahead and result in increased expenditure, first for pensions and eventually also for health and care. The savings in the Government Pension Fund make a contribution to financing these expenses, but will far from be sufficient. " BI professor Hilde Bjørnland put it this way to Dagens Næringsliv: "Only Norway can estimate a budget deficit for 2013 in the order of five to six percent of GDP without anyone raising an eyebrow."

Cultural change. At the turn of the year 2014/15, the value of the Petroleum Fund was NOK 6024 billion. The present value of the National Insurance Scheme's future obligations for old-age pensions was stated at NOK 6038 billion. Taking into account the current deficit in the state budget of 13–14 per cent – which corresponds to a deficit of 5–6 per cent measured against GDP, as well as delays in public maintenance of NOK 2700 trillion and other future welfare obligations – the Petroleum Fund has already been "used up" several times.

One may ask whether there are not more indirect consequences of our oil wealth by looking at the following statistics on Norwegian productivity:

• Four out of ten are reported sick for ailments that cannot be explained medically, but which are due to "fatigue and lethargy".
• Around 20 per cent of the working-age population is on some form of social security.
• 657 man-years were lost in 000 due to poor health and unemployment.
• Behind every man-year lost is an average of 2,3 people – and in total there are as many as 1,5 million Norwegians – who do not work in whole or in part
• In 2012, the National Insurance item in the state budget amounted to as much as NOK 370 billion. This means that we use 35 percent of the state budget to pay people who do not work in whole or in part.
• From 1962 until today, the average working time has been reduced from 48 to 30 hours per week (SSB 2006).
• From 2011 to 2016, the government expects an increase in the number of old-age pensioners from 698 to 000.
• Norway's public procurement is the most expensive in Europe, as the tender rules are poor. According to a report, public maintenance has a backlog of NOK 2700 billion (VG). For example, 75 percent of all drinking water seeps into the ground on its way to the water tap.
• Every fourth boy goes straight from upper secondary school to NAV, at the same time as a survey from the Norwegian Social Science Data Service shows that only 48 percent of the Norwegian population sees education as important. The corresponding average for the whole of Europe is 81 percent.

Today's welfare is financed in a way by passing the bill on to future generations.

Direct consequences of the Petroleum Fund. Today's oil fund is invested with about 60 percent in equities, about 35 percent in bonds and about 5 percent in real estate. The main problem with this portfolio is that it is essentially in securities, not real values ​​such as gold, silver, minerals, railway tracks and the like. When the money-printing regimes (see New Time 20.5) of the world central banks no longer work and confidence disappears, the economic collapse comes. Then it is life-threatening to have the investments in the currency, stock and bond markets. A timely question is whether we sell a real asset as "black gold" for settlement in newly printed money that over time will lose its purchasing power. As Voltaire once wrote: "Money eventually returns to its intrinsic value – zero." The quote dates from 1729, a few years after John Law introduced paper money in France, and after the Mississippi bubble burst in 1720. The statement is as valid today as it was then. History has proved Voltaire right. The average life of all the world's paper money has been about 35 years. Today, in reality, there is a currency war, in which the central banks of the five largest currencies constantly weaken their own currency by printing money.

For the Petroleum Fund, the money printing of US dollars, euros, pounds, yen and Swiss francs is a major problem, because 80 per cent of the Petroleum Fund's investments are denominated in these currencies. The Petroleum Fund risks that returns are "diluted" to the unrecognizable. All of these currencies are in the midst of a currency war, that is, the desperate struggle of the respective governments to stimulate growth through money laundering – thereby a struggle between them to weaken their respective currencies in order to improve their competitiveness. Not everyone can win this battle – but more than one can lose it, because the collapse of one or more of the currencies can lead to the collapse of the others.

For the Petroleum Fund, the printing of US dollars, euros, pounds, yen and Swiss francs is a major problem.

Out of control. The horror scenario is whether money printing and a manipulated and artificially low interest rate setting lead to mistrust in the financial market. The surest sign of an impending collapse is interest rate developments in the bond market. President Bill Clinton discovered this during his presidency, with the following apt quote: "It's the bond market, isn't it?" Then the following will take place:

1. The players in the bond market become uncomfortable, and no longer like the risk. 2. The market responds by adjusting for increased risk by discounting the inflation that takes place in the money supply. Interest rates are rising, and central banks must print even more money to try to keep interest rates down. Expect more "whatever it takes" statements. 3. But it does not help, because one is now in a vicious circle where confidence in economic policy and money pressure has been broken. More of the same makes the situation worse. The market reacts again, but now more brutally by pushing interest rates in the bond market even higher. 4. Then it becomes clear that money printing does not solve the problem, but rather er the problem itself. 5. The bond market is spinning out of control as it tries to adjust interest rates to reflect investors' lost confidence in the money-printing regimes.

Warren Buffett is one of the richest in the world, and an illustrative example. He does some of the things that the German Hugo Stinnes did in the early 1920s: Stinnes was born in 1870 into a family that had major financial interests in mining. When he took over the family business, he continued to invest in real assets – several mines, as well as cargo ships to carry the coal. Stinnes also borrowed large amounts of Reichsmark. When money printing under the Weimar Republic led to hyperinflation, Stinnes redeemed all the loans with worthless paper money and returned with debt-free mines and ships.

Warren Buffet does much of the same today: He invested heavily in the transportation sector in 2009, when he bought the Burlington Northern Santa Fe Railroad, among other things. In addition, he bought mining rights along the railway line, and he has most likely invested in the right financial instruments – those that benefit from the effects of high inflation.

Japan as an example. The Petroleum Fund has the equivalent of NOK 500 billion invested in yen, NOK 200 billion in Japanese government bonds (JGBs) and NOK 300 billion in Japanese equities. However, current returns are zero – probably negative in real terms. The main concern is related to the yen. The Bank of Japan prints 80 billion yen a year (000 percent of GDP). For the past 16 years, Japan has been in deflationary mode with large government deficits. This money printing is therefore an experiment the world has never seen before. The risk is high that one can get high inflation, with the result that the purchasing power of the yen falls sharply. The risk is that the Petroleum Fund's investment in Japanese government bonds will eventually have a purchasing power equivalent to a sushi meal in Tokyo. A high number multiplied by zero (yen) is still zero.

The risk is that the Petroleum Fund's investment in Japanese government bonds will eventually have a purchasing power equivalent to a sushi meal in Tokyo.

So what can Norway do to save the Oil Fund? By shifting the focus from paper investments (currencies, equities and bonds) to investments in real assets – railways, ships, agricultural properties, gold and mineral deposits – counterparty risk associated with these paper assets is avoided. There is a great deal of risk associated with an oil fund that has invested almost 100 per cent in paper money, unless large parts are shares in companies that own real assets.

The world's total credit has grown from about $ 10 billion in 000 to about $ 1980 billion in 199. This represents about 000 percent of the world's total gross domestic product. This growth in the amount of credit has been strongest since 2015. This should worry everyone who has invested their savings in paper investments – in other words, it should worry the Norwegian state and the Petroleum Fund. The risk is associated with the loss of purchasing power. It is a society's purchasing power that over time determines the level of welfare.

In 1962, the American oil company Phillips applied for permission to conduct seismic surveys in the North Sea.
In the summer of 1966, the first exploration well was drilled on the Norwegian continental shelf. It was dry. The story goes that Phillips was about to give up when the company in the autumn of 1969 – after being forced to carry out the last part of its drilling program – hit the mark. The Ekofisk field was found, and the Norwegian oil adventure was a reality.