Norway’s central bank, 2018: one of the governmental Oil Fund’s financial managers follows a hunch and invests in Walt Disney, using his cellphone to purchase the stocks. He accidentally adds an extra zero to the order, causing turmoil in the financial markets and in the central bank itself. How could this have happened?
It didn’t. This scene is from a new sitcom, The Oil Fund, created by Harald Zwart. Well-known in Norway as the director of several comedies, Zwart is known to an international audience thanks to Hollywood movies such as Agent Cody Banks (2003) and The Karate Kid (2010).
With ambitions to mix TV series like Billions and Suits, with a dash of The Office, the sitcom follows the everyday life of the Norwegian Oil Fund’s financial managers. Financial whiz kids in bespoke suits make high-risk investment decisions on a whim, amid a dysfunctional office culture and poor personal judgement. Banknotes flutter out of the windows, gold bars are used as weights, and the basement is packed with expensive gifts from dodgy businesses (in social-democratic Norway, of course, the managers aren’t allowed to take the gifts for themselves).
The fictional fund’s logo is a chart pointing straight upwards, illustrating the exponential growth in its market value. This rising value is perhaps the only thing the real fund has in common with the fictional one. And in today’s turbulent global economy, the chances are that even this similarity will evaporate.
The real oil fund’s CEO, Yngve Slyngstad, has repeatedly warned the general public that the fund may shrink by as much as a third, something that would dramatically reduce the steady flow of money into the nation’s coffers. And given its decisive role in Norway’s economic and political life, such risks to the fund are no laughing matter.
The Government Pension Fund Global, commonly known as “the Oil Fund” or simply “the Fund,” is the biggest sovereign wealth fund (SWF) in the world, with a market value of USD 1 trillion. A sovereign wealth fund is a state-owned investment fund derived from a country’s surplus from the export of oil or from other large income streams. Unlike national pension funds with future obligations to pay out pensions, SWFs are a pool of money owned by the state and invested in stocks and bonds.
The objective of the Fund is to safeguard and build financial wealth for future generations and facilitate government savings in the long term. The spending is defined by a fiscal rule stating that the parliament can only spend an amount equivalent to the expected financial return of the Fund, currently at 3 percent, a substantial number considering the Fund’s size. One fifth of income in the state’s budgets is covered by the Fund, financing generous welfare services and (when the conservatives are in power) tax relief.
The investment decisions are not as random as described in the sitcom and certainly do not rely on managers following their intuition. The Ministry of Finance has overall responsibility and issues strict guidelines on the operational management of the central bank that runs the Fund. The strategy prioritizes broad investment diversification, only allowing moderate scope for deviations from the benchmark index set by the ministry. The fund invests in more than nine thousand international companies and controls 1.4 percent of all global stocks.
Most Norwegians take the enormous wealth generated by the North Sea’s natural resources for granted, but the Fund’s first deposits were in fact only made in the late 1990s. Indeed, the Fund’s history reveals that things could have worked out differently.
Oil? Which Oil?
In 1958, the United Nations staged a major international conference on maritime law. The anticipation of potentially large oil and gas reserves in the North Sea made it necessary to determine territorial sovereignty and boundaries at sea. The Norwegian delegation consulted the Geological Survey of Norway, inquiring about the likelihood of finding oil or coal on the Norwegian Continental Shelf. The probability was zero, concluded the Norwegian geologists.
But the American oil company Phillips Petroleum, inspired by recent gas discoveries off the Dutch coast, took a different view and applied for permission to explore the seabed beneath the country’s territorial waters. It even offered to buy exclusive rights, seeking to secure itself a dominant position.
The Norwegians were at first surprised by the oil companies’ interest. Yet they also had experience in the management of natural resources and valuable energy production from waterfalls. After a few months, the Norwegian government proclaimed its own sovereignty over the Norwegian Continental Shelf and asserted that the resources belonged to the state and the people of Norway.
The first real discovery was made in 1969, and on the day before Christmas Eve, Phillips Petroleum reached out to the Norwegian authorities and reported their find. The field was named Ekofisk and continues to be the largest oil field ever found at sea.
On the Norwegian mainland, Christmas 1969 was celebrated in ignorance of the valuable gift the country had been given. It was not until June 1970 that the news reached the public: Norway owned potentially vast wealth, underneath the seabed.
78 Percent Tax
The discovery of natural resources is no guarantee of economic growth. On the contrary, research has shown that countries with resource abundance tend to experience negative economic effects, also known as “the resource curse.” These phenomena are described in Terry Lynn Karl’s influential book, The Paradox of Plenty (1997). She examines a selection of oil-rich countries and finds that excessive oil money adversely affects economic productivity, increases the risk of corruption, and tends to destabilize the regimes.
A decisive variable in such scenarios is the quality of the country’s institutions. The crucial decision in the Norwegian case was the law stating that the potential resources under the seabed belonged to the state and the people. The companies were granted licenses to carry out exploration activities and produce oil and gas, but the Norwegian state remained in control.
In the negotiations between the powerful international oil companies and the Norwegian government, all attempts at bribing Norwegian bureaucrats failed. Strong institutions, national control, and the absence of corruption were probably the main factors underpinning the successful Norwegian policies that were to follow, including its tax system.
The tax system has evolved since the 1970s, but the overarching idea continues to be the same: keeping up incentives for the companies to invest and produce oil, including Norwegian participation in the process, and making sure that the government receives a sizable part of the revenue. The oil companies pay an additional tax of 55 percent on all profits from oil, bringing the total level of taxation up to 78 percent.
One of the main challenges for oil-producing countries is protecting the economy from oil price fluctuations. Spending extra money when the oil price is high is easy, but the cutbacks that inevitably follow can be dramatic. The Norwegian economy experienced several serious economic downturns in the 1970s and 1980s, and the idea emerged of a fund that could stabilize over peaks and troughs.
Another challenge was the risk of “Dutch disease,” so named after the effects of the discovery of gas in the Netherlands, which brought an economic boom but also made the country’s currency more expensive and weakened the competitiveness of the traditional export sector. A fund would help limit the temptation to spend the money — but would the politicians be able to restrain themselves from spending the extra money?
No, concluded the Ministry of Finance, which firmly rejected the idea. Yet it developed support in parliament. By the late 1980s, both Labour and the Conservatives — together amounting to a substantial majority of MPs — were in favor of a Fund. The Ministry of Finance is an influential force in Norwegian economic policy, but in 1990 it had to give in to political pressure.
Today, these two main parties and the Ministry of Finance are the iron triangle of the Norwegian Oil Fund, agreeing on all the main decisions regarding its fate, including the Fund’s strict guidelines: all surpluses from oil exports are channelled directly to the Fund, spending has to be kept visible in normal national budgets, and the Norwegian market is excluded from the Fund’s investment universe.
The Norwegian parliamentarians understood the message and compared the Fund with Odysseus’s beeswax — used by his crew to block out the temptation of the sirens’ song. Like Odysseus and his men, Norway’s political leadership must be protected from all manner of wonderful suggestions on how the oil money should be spent. Yet Labour and the Conservatives both agreed to institutionalize rules of self-restraint.
For years the Fund was no more than an empty bank account. When money started to pour in, so did the public’s views on how to spend and invest the money. In public, the main advocates of spending more were the right-wing populists, but the pressure within the main parties also grew.
Labour’s Jens Stoltenberg, the Norwegian prime minister at the time, was accused of having “forgotten the PIN code” to draw on the Fund, and in 2001 the government implemented a fiscal rule to define the share of oil revenue that may be spent over the national budget, equivalent to the expected financial return. Ever since, all governments of both Left and Right have been loyal to the fiscal rule, including the current Minister of Finance from the populist right.
Ethical concerns regarding the fund are, in fact, more controversial than the fiscal rule itself. The original idea for the Fund was to invest the money according to strict financial guidelines, but the media has repeatedly exposed Norwegian money being invested in arms companies — including land mine manufacturers. Faced with a civil society campaign, the iron triangle of Labour, the Conservatives, and the Ministry of Finance fought fiercely against imposing ethical guidelines, but eventually had to give in to public pressure. In 2004, the parliament approved ethical guidelines for the investments and established a Council of Ethics to monitor them.
In the sitcom, the Fund’s Council on Ethics plays a dominant and decisive role. In reality, it has limited powers. The recommendation to exclude Walmart in 2006 attracted international attention and protests from the American ambassador in Oslo. However, media coverage of investments in dubious companies continues to be commonplace. Today only 125 companies out of 9,000 are excluded from the investment universe, and the recommendations from the council are likely to be moderated by the executive board of the central bank, who make the final decisions.
Norway’s Green Paradox
Oil and gas are essential to Norway’s wealth, but most Norwegians identify as citizens of a green, environmentally friendly country. Norway plays an active role in international climate negotiations, helps finance the fight against deforestation, and has implemented substantial tax relief on electric cars, meaning that carparks now have a large share of such vehicles. The paradox of financing electric cars with money from exporting oil is rarely mentioned.
Environmental organizations urge the Fund to more seriously address problems related to climate change, both by excluding companies that can harm the environment and by increasing investments in green companies. The Fund’s strategy does include environmental considerations, but as the sitcom itself shows, they do not dominate its whole portfolio. The green paradox or other controversial issues are rarely mentioned.
The sitcom is meant to be a light-hearted comedy, but has received mixed reviews for not challenging Norway’s self-gratification: one reviewer even called it a waste of oil money, given that director Zwart got NOK 4.2 million (approximately USD 0.5 million) in support of the production. But perhaps the sitcom’s lack of success is not entirely down to its creators. Even though the Oil Fund is the main contributor to the welfare state, most Norwegians are not comfortable talking about their wealth. Much like in families with “old money,” it is considered rude to talk about it: and there is of course no need to talk about plenty if you have plenty.
This situation will not last forever. Predicting future financial returns is a difficult job, but the income streams from oil and gas will eventually come to an end, hopefully because of renewable energy sources replacing the need for oil. As yet, there has been little public debate on Norway’s green paradox. What remains to be seen is whether the reduction in the Fund’s market value and the mounting consequences of climate change can change that.