Everything Everywhere Daily: History, Science, Geography & More - The Norwegian Sovereign Wealth Fund

Starting point is 00:00:00 On Christmas Eve, 1969, the nation of Norway received a massive Christmas present. After years of failed drilling attempts, Norway announced that they had discovered one of the largest oil reserves on Earth. This remarkable find would immediately transform Norway from a quiet industrial and fishing-based economy into one of the world's 10 largest exporters of fossil fuels. But unlike other countries with massive natural resources, Norway adopted a long-term strategy to invest its oil revenue. Learn more about the Norwegian Sovereign Wealth Fund

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Starting point is 00:01:58 Every week on Conspiratuality Podcast, we explore the fever dreams that suck friends, family, and wellness gurus down the right-wing cult spiral in a search for salvation. In 1959, a team of shell and standard oil researchers on a quiet beet farm in the Dutch province of Kroningen struck a large pocket of natural gas. Subsequent discoveries began to pop up across the region, revealing the world's largest natural gas reserves estimated at nearly 100,000. trillion cubic feet. This discovery prompted an oil and gas exploration boom across northern Europe. At first, Norway didn't even have clearly defined offshore petroleum rights. Then in 1962, the American oil company, Phillips Petroleum, asked the Norwegian government for permission to explore their Norwegian continental shelf, reportedly offering a large sum in exchange for exclusive rights. The government rejected the idea of giving the continental shelf to a single company,

Starting point is 00:03:06 but the request alerted Norwegian officials to the area's potential value. Norway then moved quickly to establish sovereignty over its offshore resources. In 1963, the government declared that the natural resources of the Norwegian continental shelf belong to the Norwegian state. Norway also negotiated boundaries with Denmark and Britain, largely using the median line principle in which offshore territory was divided according to the midpoint between neighboring coastlines. In 1966, the Norwegian government partnered with several international companies, including Phillips, ESO, Shell, and others. Despite its commitment to preventing foreign control of its oil, Norway had to rely on foreign companies for exploration because it lacked domestic

Starting point is 00:03:50 expertise in the petroleum industry. After years of failing to find oil, hope began to fade. By 1969, Phillips Petroleum was reportedly considering a reduction in its exploration efforts. Before abandoning one of its remaining prospects, however, the company drilled another well in Block 2-4, about 300 kilometers southwest of the city of Stavanger, known as the Echofisk site. And it struck oil. When drilling began in 1971, it was believed that the well would probably run dry by 1988. However, generations of Norwegian scientists focused on improving the technology at the drill site have extended the life of the well and others in the region far beyond those original estimates.

Starting point is 00:04:36 Norway adopted technological breakthroughs and offshore drilling from the United States and the British and expanded on them, taking into account the realities of the North Sea oil shelf. Norwegian scientists have developed 4D technology to track oil movements, new extraction methods to increase well capacity, and sub-sea rigs that operate on the ocean floor far away from the dangerous conditions on the surface. While the original Echofisk well has long been exhausted, other wells in the system are still producing at maximum capacity. Norwegian geologists estimate that the region's oil reserves are still at nearly 50%, with high hopes that Norwegian scientists can continue to maximize oil extraction. To date, the region has produced an estimated 54 billion barrels of oil.

Starting point is 00:05:23 While oil prices have fluctuated over that time, the net proceeds from its sales are estimated to have exceeded $1 trillion. These oil proceeds look even more impressive when you consider that Norway's population was less than $4 million when the Echophist well was struck and is about $5.6 million today. An astonishing resource base for a country with the population of Berlin. This episode, however, is not really about Norway's petroleum industry per se. It's about what they decided to do with the money. For many countries with large oil reserves, petroleum production can be just as much a blessing as a curse. Oil-rich countries tend to experience more corruption, authoritarianism, and economic instability, because governments can rely on petroleum revenues instead of taxes and broad-based economic development.

Starting point is 00:06:17 After the discovery of oil in 1969, Norway established principles to guide its oil management. In the summer of 1971, the government issued Norway's Ten Oil Commandments. The edict focused on ensuring that foreign interests would not dominate the benefits of the discovery and that the discovery would be carried out in an environmentally conscious manner. These principles were applauded in 1971 and remain in place today. Perhaps the most influential section of the Ten Commandments was its preamble, which sets out the program's goals, stating, quote, the petroleum resources must be managed in a way that ensures that they benefit the entire Norwegian community, end quote. To this end, Norway established a sovereign wealth fund, a state-owned investment portfolio to benefit the country in perpetuity.

Starting point is 00:07:09 Norway recognized as early as a 1983 government report that it needed to avoid what, Economist called the Dutch disease. The Economist magazine coined the term Dutch disease to describe the adverse impact of an immediate influx of natural gas wealth on the Netherlands. The influx of foreign capital tends to strengthen the country's currency and attract labor and investment to the oil and gas sector, making other exports, such as manufacturing and agriculture, more expensive and less competitive abroad. Over time, those non-oil and gas sectors, shrink, leaving the economy unusually dependent on the resource industry. Soaring costs led to an unemployment crisis in the Netherlands as Dutch industries were forced to lay off workers due to slumping

Starting point is 00:07:57 sales at home and abroad. Unemployment data during the Dutch disease crisis vary, but general estimates indicate that unemployment doubled from less than 4% to nearly 8%. The Dutch took the short view, hoping that immediate consumption would fuel permanent growth. The Netherlands wasn't the only country that had to deal with massive sudden inflows of oil and gas money. In the Persian Gulf states, the oil crisis of the 1970s led to huge increases in crude oil prices. Global prices surge and eventually quadrupled over the decade, inundating the Gulf states with tons of foreign cash. Unlike Norway or the Netherlands, the Gulf states didn't have many other domestic industries, so they use their money to make new non-oil and gas industries.

Starting point is 00:08:47 The Gulf states are similar in that oil revenue flows directly into the government and residents don't pay income taxes. Each of these states handled its influx of oil revenue differently. Saudi Arabia used its vast oil wealth to build modern infrastructure across the country and help reimagine the Arabian Peninsula as a technological hub. Koddur used the Northfield, one of the world's largest natural gas deposits, to buy an impressive suite of foreign assets, and to fund the nation's 2022 World Cup, which cost a staggering $220 billion, an amount that they will almost certainly never come close

Starting point is 00:09:23 to recouping. Abu Dhabi and Dubai in the United Arab Emirates took different paths. Dubai is smaller and has fewer oil reserves than its fellow emirate, and has focused on making Dubai an international destination for travel and business. Dubai built Jebel Ali, the world's largest man-made harbor, and operates, arguably the world's most famous and glamorous airline, Emirates. Abu Dhabi has greater oil reserves and is allocated its wealth differently. Abu Dhabi has invested substantially in the nation, focusing on infrastructure improvements

Starting point is 00:09:53 and modernization. They've also created its own sovereign wealth fund, but it operates with a very different set of objectives than Norway's and utilizes a much more aggressive investment strategy. Compared to the Gulf states, Norway chose a far more disciplined and democratic path. The Norwegian Fund is currently valued at just over $2 trillion, nearly 20% larger than the Emirates Fund. Norway's Parliament established the fund by law in 1990 amid great fanfare. Norway made its first deposits into the fund in 1996. The six-year gap in the deposit schedule occurred because the Norwegians used the original proceeds to cover the massive startup costs

Starting point is 00:10:35 of building the oil infrastructure in the 1970s. The 1980s saw Norway dedicated to, much of its oil revenue to a series of infrastructure projects across the country. Beginning in 1996, Norway invested 100% of its oil revenue into its fund, which was renamed Norges Bank Investment Management in 1998. The fund has a remarkable clause that no other fund of its kind can claim. It cannot invest in Norwegian interests. This might seem very counterintuitive, but this mandate blocks domestic corruption, prevents crony capitalism, and directly addresses the potential effects of Dutch disease. Equally impressive, in 2004, the fund added another unique quality. It created a council of ethics. The council established rules prohibiting the fund from investing in foreign

Starting point is 00:11:26 companies that commit human rights abuses, cause environmental damage, or profit from tobacco. The fund's investments can be tracked on a government website, which shows exactly how much the fund is worth at any given time and what it is invested in. Today, the investment portfolio spans more than 9,000 companies worldwide and is built on a platform of equity investments, fixed income products, and international real estate. The fund's consistency is a truly remarkable achievement for any government, but particularly for a democratic government. Political wins have shifted in Norway since 1996, yet regardless of what party is in power, the government and voters have not changed the fund.

Starting point is 00:12:10 Abandoning the fund or its goals has never been a real consideration since it was established. The fund even weathered the global financial crisis of 2008 without any political debate over a strategy change, even as its value plummeted alongside the world's stock markets. The fund's growing success certainly adds to its legitimacy. Each of the more than 5.5 million Norwegians is technically worth, more than $400,000 a piece, thanks to the fund. Yet, the fund does not allow any Norwegians to claim individual shares. The fund's purpose is clarified in its foundational documents, which notes, quote, the purpose of the government pension fund is to support government savings

Starting point is 00:12:55 to finance pension expenditures under the national insurance scheme, and to support long-term considerations in the spending of government petroleum revenues, so that the petroleum wealth benefits both current and future generations. End quote. Norway's sovereign wealth fund gives it a much stronger financial cushion for future pension costs than most heavily indebted European countries have.

Starting point is 00:13:20 That matters for pensions because Norway does not rely solely on future taxpayers to finance future retirees. It has an enormous pool of invested assets that can help support government spending as the population ages. In economic terms, Norway has to be a lot of, has partially pre-funded the financial burden associated with future pensions.

Starting point is 00:13:42 Many other European countries operate much more heavily on a pay-as-you-go basis. Current workers pay taxes and social insurance contributions, and that money is used to pay current retirees. That system can work well when there are many workers for each retiree, but it becomes more difficult as birth rates fall in population's age. Governments then have to raise taxes, cut benefits, raise the retirement age, age or borrow more money. The Norwegian Fund's formula allows the system to be maintained by withdrawing only 3% of

Starting point is 00:14:15 the fund's interest to cover government expenditures. By borrowing only from accrued interest, the fund preserves the principle as a legacy for all Norwegians, both present and future. If all the oil in Norway were to dry up tomorrow, Norway's sovereign wealth fund would continued to benefit the people of Norway for decades and maybe even longer. And it's all because they had the foresight and more importantly, the discipline not to squander their petroleum windfall. The executive producer of Everything Everywhere Daily is Charles Daniel.

Starting point is 00:14:52 The associate producers are Austin Otkin and Cameron Kiefer. Research in writing for this episode was provided by Joel Hermanson. My big thanks go to everyone who supports the show over on Patreon. Your support helps make this podcast possible. And I also want to remind everyone about the community groups on Facebook and Discord, as this is where everything happens outside of the podcast. As always, if you leave a review on any of the major podcast apps, you too can have it run in the show.

Everything Everywhere Daily: History, Science, Geography & More - The Norwegian Sovereign Wealth Fund

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