Freakonomics Radio - 182. How Can Tiny Norway Afford to Buy So Many Teslas?

Episode Date: October 16, 2014

The Norwegian government parleys massive oil wealth into huge subsidies for electric cars. Is that carbon laundering or just pragmatic environmentalism?

As you likely know, the American automobile company Tesla makes some of the most desirable and expensive electric cars in the world. The company is currently valued at roughly $31 billion. Compare that to the $55 billion market cap of the Ford Motor Company. Tesla, however, last year sold fewer than 25,000 cars, while Ford sells more than 6 million vehicles a year, roughly 240 vehicles for every single Tesla. Tesla currently has just one vehicle in production, the Model S luxury sedan. In the U.S., the starting price is a bit more than $70,000. Americans buy more Model Ss than anyone, which isn't very surprising.

But which country do you think has routinely been coming in second? From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner. Okay, here's the question of the day. Tesla Motors opened its first stores in California in 2008. Today, the U.S. is still the largest market for this tiny beloved automaker. China is poised to become the second largest, may already be, we just don't know it yet. But until the China takeover, what country do you think ranked number two on the list of Tesla deboutages? Oh, sorry, you don't speak Norwegian, do you? But yes, Tesla's second biggest market in the world, at least until recently, was tiny Norway.

Population, 5 million. This is planet Earth, and this, this is Norway. Many people think that Norway is the capital of Sweden. So if you think so right now, you are wrong. Now, remember that electric vehicles still make up a tiny share of overall vehicle sales, and Tesla doesn't sell many cars, period. So the Norwegian numbers aren't gigantic, an average of 436 cars per month this year. In one month, however, March, there were nearly 1,500 Teslas sold in Norway, the most cars of any sort ever sold in a one-month period in Norway. Not just electric cars, cars period. One of every 10 new cars registered that month in Norway was a Tesla

Model S, which is pretty amazing for a luxury sedan whose base price in Norway is more than $100,000. Have you been considering buying a Tesla or an electric car for yourself? I don't think I have the money for that. But my father think of buying an electrical car. How many people do you know have an electric car? Two, both Teslas. I would say, yeah, maybe 20 to 30 people. One, I think, but I see a lot on the streets, and yeah. About maybe 10, 20 people that I know.

Too many. I know personally two or three very well. Do you have one yourself? Not at all. I work in an American oil company. I'm very jealous of my neighbor that has a Tesla, so I might need to buy one myself. The last two and a half months, I've had my own,

and I love it. So what's behind the Tesla boom in Norway? Well, for starters, Norway is fond of electric vehicles generally. It has a higher share of them than any other country in the world. It's easily the biggest European market for electric vehicles. This has to do with both demand and supply. On the demand side, Norwegians are affluent and see themselves as proudly green. The country plans to reduce its greenhouse emissions by 30 percent by 2020.

And on the supply side, Norway gets virtually all its electricity from hydropower, which is both cheap and clean. But might there be some other reason why so many electric vehicles, and Teslas in particular, are being bought in Norway? Because right now you're free to drive in the bus lane if you own an electric car, and I think that's a major advantage. It takes 10 minutes to get to the office instead of one hour if you have a Tesla. Free public parking. You don't have to pay at the toll roads. Again, the incentives are the big point here. Ah, the incentives. They are, shall we say, substantial, as Tesla makes clear on its website. If you buy one, the annual registration fee is waived as are tolls and

you get access to less congested traffic lanes. If you drive for a living in Norway, an electric car gets you an income tax deduction. And here's the biggest difference. The Norwegian government makes electric cars, including the Tesla, exempt from some very, very hefty sales taxes. So when you add all this up, the difference between the price of a Tesla and the price of a similar gasoline-driven car is huge in Norway compared to other countries. And so, in relative terms, a Tesla is a lot cheaper than other cars. Okay, so the Norwegian government is massively subsidizing electric vehicles, even the very expensive ones. That's nice, especially if you want to buy a Tesla yourself. They want to have a good electric car, and the Tesla is a very nice car, you know.

They're subsidized, and they look good. The Tesla looks good. Now, keep in mind that these subsidies may be phased out, and soon. Jay Cole, the editor of the website Inside EVs, which covers the electric vehicle industry, tells us that once Norway hits a ceiling of 50,000 electric vehicles, the tax breaks may be allowed to expire, which gives even more incentive to get a Tesla today. Now, you may ask yourself, where does the government of such a tiny country get all the money to subsidize a luxury electric car to the point that it is the best-selling model in the country? It's massive hypocrisy because we are one of the largest distributors of oil and gas in the world.

For sure, it's a really contradiction. Yeah, I think it's kind of hypocritical because we say that we care about the environment and want to do something about it, but in fact we are one of the worst. That's right. Norway, one of the greenest countries in the world, can afford to be so green partly because it is so rich in fossil fuels. It is the biggest oil producer in Western Europe, the third largest exporter of natural gas in the world.

The environmental politics is full of double morale. So that is just how it is, right? We are doing that with the right hand, we're doing that with the left hand, so it's a pity. I think it's what is the word again? What is it? A paradox.

A paradox, yes. It's a paradox. What she said. A paradox. Pumping all that oil and gas that gets burned somewhere else and which generates the money to let Norway be super green. Is that super green or is it more like carbon laundering?

Okay, so my name is Martin Skanka. We went to this gentleman to find out. I work as an independent consultant now, specializing in advising countries with natural resources and how to manage those resources. And I've been doing that for the last three years. Prior to that, I worked for many years at the Norwegian Ministry of Finance. Years ago, Skanka helped set up Norway's sovereign wealth fund. If you're not familiar with that phrase, well, it's essentially just an investment fund that manages government money. Some of the biggest sovereign wealth funds in the world belong

to Saudi Arabia, China, the United Arab Emirates, and Kuwait. So you get the picture. Now, as I said, those are some of the biggest sovereign wealth funds in the world, but none of them are number one. Guess who's number one? But we tend to be relatively conservative, I guess, in a sense. Tell us a bit about Norway. So I paid my first visit to Norway a couple months ago. It was fascinating on many, many levels and enjoyable on many levels. I have to admit, though, for someone who I thought I knew at least a little about most places, most of what I learned about Norway I hadn't known at all. So I'd love if you could just give us a very brief summary of the country for those of us who know even less than I knew coming in. Just some summary statistics perhaps having to do with the size,

the economy, how the government works, and so on. Let's start there. Yeah. So Norway is a country in Scandinavia, northern Europe. It achieved its independence a little over 100 years ago, 1905, after being first in union with Sweden for 100 years and then ruled by Denmark for 400 years before that. So, in a sense, it's a relatively young country,

about 5 million people now. And traditionally, of course, fisheries was a big export sector and also because of access to cheap hydroelectric energy, we had a large metal sector, aluminium sector, for instance. And then about 45 years ago, on Christmas Eve 1969, oil was found in the North Sea outside the coast of Norway. And the oil revenues started flowing in to the government in the 1970s. So we've had oil revenues for about 40 years. Since ancient time, Norway has survived on fish, potatoes, rocks and plundering. And then in the 1960s, we invented the oil.

We gave up rocks and plundering, but we still like fish and potatoes. The invention of oil has in many ways laid the foundation of today's society, where we are born with skis on our feet. You are the only folks in the neighborhood who have oil, which is just a matter of geographical fortune. Tell us a little bit about the circumstances. Who made the discovery? How did it happen?

This particular discovery was actually made by Phillips Petroleum out of Bartlesville, Oklahoma. And that field was developed into what's called the Ecofisk field, still one of the largest, most productive fields in Norway, even after 40 years. Okay. And what share of Norwegian oil is undersea? Oh, 100%. Everything is offshore. Okay. So, you had this previously absolutely invisible and unknown wealth just sitting out there. And then it was now no longer invisible and no longer unknown. And what happened then?

1969, you said, was a discovery. How much money started to come in and how did the government handle it initially? The net cash flow to government was really moderate for the first few years in the 1970s. But what happened was, and this is the case in many oil producing countries, is that sort of expectations of future revenues sort of outran the actual revenues. And I think that had an effect in two ways. So because we had this money, I think the government felt freer to spend money to increase demand. And I think less attention at the time was given to structural changes. In a sense, we spent money on avoiding change and avoiding a restructuring of, for instance, state-owned industries and inefficient industries that we had at the time.

That was one aspect of it. And another aspect was the effect on expectations in the private sector, expectations in the companies, the demand for labor and wage growth was very high, inflation was very high. And that was a side effect of this discovery of oil. This side effect was not unique to Norway. In fact, it's commonly called Dutch disease. In the 1960s and 70s, the Dutch economy began to go sideways after the Netherlands discovered natural gas in the North Sea. The economy becomes too specialized in the production and the export of the natural resources, crowding out the other sectors of the economy. That's Darren Asimoglu. I'm a professor of economics at MIT.

I do political economy, labor economics, and economic growth. Asimoglu is also the co-author, with the Harvard political scientist James Robinson, of a book called Why Nations Fail. In it, they argue that the type and quality of the political institutions in a country greatly influence its economic success. One example might be how a government deals with Dutch disease. If you suddenly have a lot of oil or gas and start selling it abroad for lots of foreign currency, the domestic currency can rise sharply. What happens is that when you have this sharp appreciation of the domestic currency, that

makes a lot of the merchandise that an economy usually sells abroad non-competitive. And so what that does is that it sort of forces the economy to move away from manufacturing. And there are two sorts of reasons why people generally think that manufacturing type jobs are socially valuable for an economy. One is that they are generally thought to be the higher paying jobs. And then the second, that is more sort of a dynamic version of that, that many economists believe that there is greater room for learning by doing technological progress, innovation, and other sorts of economic dynamism in the manufacturing sector. Norway, when it began selling all that new oil and gas, got a pretty bad case of Dutch

disease. Martin Skanka again. Through the 1970s, we had increasing problems with competitiveness because of high wage growth and high inflation. We had still large investments on the continental shelf, and the country was borrowing a lot of money because we had large current account deficits, one of the largest current account deficits in any OECD country at the time. And we were very close to having to ask for an IMF stabilization program at that time. And then came in 1979, 1980, the revolution in Iran.

And oil prices quadrupled from $10 a barrel to $40 per barrel. And suddenly things seemed very rosy. People got very optimistic again. And in the 1980s, it was a period of very high consumption growth, high credit growth, very accommodating policy. And when oil prices fell in 1986, the economy to some extent collapsed because the economy was not resilient enough to handle an oil price fall of that magnitude has happened in 1986. So on the back of that, we got a banking crisis, because people didn't have money to repay their loans and house prices fell. And so unemployment increased, and we had to cut back on government spending because of the fall in oil prices. So I think in that time in 1990, we were still in the middle of a crisis. But there was thinking among, I think, some very foresighted technocrats, really civil servants in the Ministry of Finance and some politicians who felt that if we ever had sort of a third chance. I would think that at latest, by the end of this decade, the fund would be a trillion dollars.

And now other countries look to Norway to figure out all the exciting things to do with their sovereign wealth. But I want to talk about audits and reporting and the boring stuff. And one more thing that is not boring. You can subscribe to Freakonomics Radio at iTunes and on other podcast apps. It's free, it's easy, and I can promise you it won't give you Dutch disease. From WNYC, this is Freakonomics Radio. Here's your host, Stephen Dubner. In 1969, Norway discovered what turned out to be a massive amount of oil and gas. This was not entirely good for the Norwegian economy. There was a lot of instability. But after a couple of decades, they came up with a solution. Norway created a sovereign wealth fund.

So I think it was seen primarily as a tool to stabilize the economy and to introduce sort of a buffer between the very volatile oil revenues and the non-oil economy. The fund was set up then in 1996, correct? Well, the formal structure was set up in 1990 in the middle of the crisis. Of course, then we didn't have any money to put in the fund. And the first allocations to the fund, the first money was set aside in the fund in 1996. The fund in 1996 had about $200 million in it, is that right? Yeah, the first allocation was about $200 million, yes. Okay, and now here we are talking just a little bit more than 18

years later. How much money is in the fund or funds today? About $850 billion. That's a nice number, isn't it? I mean, it's's a lot of money and you have to remember it's a population of five million people which works out to you could give them all about 160 000 each i guess if you wanted to liquidate yeah uh-huh yeah uh and you're projected projections being what they are in this realm but you're projected to hit a trillion dollars as the value of the sovereign wealth fund in six or seven years, something like that? Yeah, or maybe even sooner, depending on oil prices and returns in markets. But yeah, I would think that that latest by the end of this decade, the fund would be a trillion dollars. For a country of five million, let's face it, you're loaded. You're loaded, yeah? Yes, but we have an unfunded pension system,

a pay-as-you-go pension system, which means that the government actually has a lot of unfunded liabilities as well. But when the fund was established, and actually during the last decade in particular, when oil revenues have been very high, this became also a tool for transfer of financial wealth to future generations. And so that aspect of it has

become much more important as the fund has grown in size. Like a lot of Western countries, Norway has a graying population. So it looks to its massive sovereign wealth fund as a kind of national 401k. But Norway being Norway, it has an unusual investment philosophy. Norwegian citizens are the ultimate owners of the fund, and we shouldn't be making money in a way that they are not comfortable with. And so we've said that some of the worst forms of ethical breaches are things that we will not want to invest in. So can you tell me just a little bit about the kinds of industries, the kinds of companies, the kinds of behaviors that you don't invest in? Yeah. So there are two different groups in a sense.

One group are those companies that are excluded because of what they produce. And the other group are those companies that are excluded because of how they produce what they produce. So the product-based exclusions are some forms of weapons, like nuclear weapons, like cluster munitions, chemical weapons. And then we have tobacco. Those are sort of excluded. So that nearly $1 trillion, none of it is in tobacco products? No, none of it is in tobacco. Okay. Alcohol okay?

Alcohol is okay. Marijuana? I don't know that there are any listed companies that produce marijuana. So I'm sure that that would come up if that were the case. All right. So knowing Norway as you, let's say that the marijuana economy begins to really take off, which it is starting to do, and there will be listed companies that deal with marijuana. Do you think that's something that the fund, that your fund would be okay with? My guess would be no, for the same reasons that tobacco is excluded. Among the other stocks you will not find in Norway's sovereign wealth fund,

Walmart, because of its, quote, serious slash systematic violations of human rights and labor rights. The fund has barred some Israeli companies that did construction in the West Bank or East Jerusalem. And there's a movement right now to divest in fossil fuel companies. This is an issue that we're looking into. And I'm heading a commission expert group that's set up now to look into the issue of fossil fuel investments for the fund. Let me just ask you this. I'm curious how you reconcile the fact that your country primarily uses oil wealth to grow its sovereign wealth fund for future generations and so on. But part of that strategy is to find, you know, environmentally friendly, less polluting, more renewable, sustainable industry. So on the one hand, that sounds morally praiseworthy that you're going out of your way to support practices that you morally approve of. On the other hand, you could say that it sounds a little bit like carbon laundering of some kind, right? You take your oil out of the sea.

You don't even use much of it yourself. You export all of it, nearly all of it. And then you turn that into money that you then build wealth with in a more environmentally morally responsible way. Is that a conflict for you or Or is that just the reality of the world and you live with it? It's true that we have investments in, let's say, environmentally friendly technologies, but those are not subsidies. It's commercially oriented and it's within the ordinary investment program of the fund. But the idea behind the fund is really to buy a slice of the entire productive capacity of the countries that we invest in, including oil companies.

And these companies are also in the process of transforming themselves into energy companies more generally. The fact that Norway, owner of the world's largest sovereign wealth fund, might empty that fund of fossil fuel stocks may strike you as ironic, since so much of Norway's wealth comes from fossil fuels. The same wealth, you'll remember, that helps the government subsidize all those Teslas and other electric cars. Norway is quite the little bundle of paradoxes. Consider this one. Among the countries with the biggest sovereign wealth funds, Norway is the only liberal democracy. The rest are,

well, quite the opposite of liberal democracies. And most of them also got rich from oil. This makes Norway an even bigger paradox. Economies that have abundant natural resources also have very easy rents that can be captured by groups that become politically powerful. That, again, is Darren Asimoglu, co-author of Why Nations Fail. So the image that you might want to have here in your head is, if you were a politically powerful group or dictator or a warlord, would it be easier for you to milk the high to be a blessing for a select few and for the rest of a country's citizens, a curse. It's called the natural resource curse. incentivizes lots of groups to become much more conflictual in order to take control of state institutions, be able to become politically powerful or blocking actors in order to be able to benefit from these natural resource rents. And the extreme form of this is the sort of civil wars that have ravaged countries like Sierra Leone and Angola, where diamonds, another form of natural resource

that's perhaps even easier to mine and exploit than oil, have played a major role, or the huge political instabilities that have erupted in places like Venezuela and Nigeria around the oil economy. Martin Skanka, since leaving the Norwegian Ministry of Finance, has advised other countries around the world how to properly manage their natural resource wealth. You are familiar, I'm sure, with the idea of the natural resource curse that economists and other social scientists talk about. And it turns out that a lot of countries around the world that do have a lot of oil and mineral reserves tend to be some of the most unstable, undemocratic countries in the world. I understand that you've been an advisor to governments, including those of Libya, Iraq, Azerbaijan, Venezuela, on how to handle the revenues of natural resources, presumably how to set up their own sovereign wealth funds. Can you talk about trying to solve that puzzle?

Yeah. So, it is true that on average, countries with natural resources tend to do worse than countries that don't have natural resources. So, that's, of course, a bit paradoxical in the sense that at the outset, you would think that natural resources and sort of an extra added bonus that would make you better off. If you go behind those numbers and look a little bit and introduce a second sort of explanatory variable, which is some indicators of quality of institutions, you actually see that it's more correct, I think, to think of oil and gas, natural resources as sort of an amplifier in the sense that those countries that are relatively well-governed and have good institutions and find oil do even better afterwards. But those that are poorly governed to start with and have weak institutions and find natural resources do even worse. So, in many ways, this is not a resource curse as much as an institution curse. And the problem, I think, is that if you have weak institutions to start with, they are simply not able to handle the demands of a large natural resource sector because the

pressure on institutions becomes so large, because the level of conflict in society increases because there is so much more to fight over. And you really need strong institutions to sort of broker between different political factions and have institutions that give you stability even in shifting political climate. And I think that is a real curse in a sense. It's not the oil in itself. So what do you try to accomplish when you consult or advise to a Venezuela or a Libya?

Is the idea to say, let's take the money, turn it into a sovereign wealth fund that invests in a responsible way that will shoot off enough revenue and income to support stronger institutions? And let's do all that while some despots don't manage to steal the money? Well, Venezuela, I haven't been to for 20 years. But I've done projects in Libya, East Timor, Papua New Guinea, Burma, a lot of countries. And I think the first question is whether it actually makes sense to have a sovereign wealth fund. And I think for many countries, if they have a large stock of outstanding debt, it probably makes sense to repay that debt before you start building up a fund.

So in very many cases, my advice is not to establish a fund at all, but rather to use money to repay debt. And then I think the main issue in establishing a fund is really governance and governance structure. And the common theme, I think, in any country that I am in is that a lot of people want to talk about investment strategy because that's really exciting, but I want to talk about audits and reporting and the boring stuff. And so it's most

of my work is actually directed towards issues of governance rather than investment strategy. Skanka is the first to recognize that Norway has some built-in advantages that other countries don't. Norway is a relatively homogeneous country with a very sort of low level of conflict. And that has, of course, made management of oil revenues a lot easier than it is in many of the developing countries that I work with primarily now. That said, there was no guarantee things would work out as well as they have for Norway. Darren Asimoglu has not spent a lot of time studying Norway and its Scandinavian neighbors. His book, after all, is called Why Nations Fail, not Why Nations Succeed. Even so, he knows a success story when he sees one. It's really an exemplary case of how to best

make use of the natural resources for the welfare of the citizens without creating instability. I did wonder, however, if Norway's oil wealth had crowded out other industries. I asked Martin Skanka about this. So, your next-door neighbor, Sweden, who used to run you, doesn't have oil, but it does have a lot of big, long-standing, profitable global industries and firms. Yeah. You know, everything from banking, telecommunications, Ericsson, Volvo, IKEA, and so on. All things equal, all else equal, if you could choose, would you rather be Sweden? Because your dependence on oil, it seems as though Norway has managed it incredibly well on many, many, many dimensions.

And yet it's a dependence on a resource that is complicated, let's say. I was born in Sweden, but I'm glad I live in Norway. So, no, you know, if you look at income levels now are about 30% higher in Norway than in Sweden. And it is true, I mean, the Swedes have been incredibly clever with a lot of their global brands, both in manufacturing and service industries. They have a very different tradition, which goes back centuries. A lot of more accumulated wealth. They had nobility. Norway was farmers and fishermen and natural resources.

And there was never a basis for building up those types of manufacturing industries as the Swedes have. But I think Norway now, as you say, the main challenge for us is resilience in our economy in the face of possible, you know, fall in oil prices or oil revenues and whether we will be able to live with a high cost level that we have built up over so many years with high oil revenues. But I think the Norwegian economy has proved to be relatively flexible and adaptable. We have very high labor force participation rates. We have a well-educated workforce. So I think that gives a lot of extra and a lot of electric cars, too. The Norwegians I met with on my visit were remarkably candid about the carbon laundering idea. Candid and honestly contorted.

They were eager to discuss the discomfort that comes with using oil wealth to put not just a chicken in every pot, but a Tesla in every driveway. This eagerness, it strikes me now, is perhaps yet another sign of institutional health. Rather than taking their nearly $1 trillion sovereign wealth fund for granted as an entitlement, they see it for the paradox it is, and they appreciate it even more. Hey, podcast listeners, on the next Freakonomics Radio. And most of all, thanks to you for coming here to tell me, say it with me, tell me something I don't know. The debut of our new game show, Tell Me Something I Don't Know. You'll hear from audience contestants and celebrity judges Malcolm Gladwell,

Anna Gasteyer, and former New York Governor David Patterson, all trying to tell you something that you don't know. That's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC and Dubner Productions. Our staff includes David Herman, Greg Rosalski, Greta Cohn, Caroline English, Susie Lechtenberg, and Chris Bannon, with help from Joel Werner. If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics.com, where you'll find lots of radio, a blog, the books, and more. Thank you.