- - Wednesday, December 25, 2013

Some 50 years ago, Njord, the mythological Norsk god of wealth, smiled on the hardworking fishermen and lumberjacks, and presented Norway with the gift of oil. In financial terms, this was a handsome gift indeed, currently translated into a natural bounty worth $740 billion.

Successive Norwegian governments pledged to save this wealth for the welfare of future generations. Yet, half a century after this windfall began, questions increasingly arise of whether Norway’s handling of its oil wealth has even withstood the test of the past, much less the future.

The country’s 2013 election campaign spawned a debate about the government’s management of the massive Norwegian Oil Fund. Norwegian citizens, however, have been trapped within a virtual bubble: Far from raising and discussing serious concerns, the debate in which the country has been engaged is fundamentally flawed. Behind the rosy picture that Norway’s leaders have painted of the country’s economy lie some difficult truths. We have only to chip away a little at this bright facade to realize that a far less glittering reality lies beneath the surface.

First, the oil fund is a mathematical artifice. At three-quarters of a trillion dollars, the Norwegian Oil Fund appears to provide plenty for a country with scarcely 5 million citizens. Yet the country has accumulated a foreign debt that, at $657 billion, is almost as massive. Subtracting the debt from the fund’s $740 billion leaves a balance of only $83 billion. In other words, there is a treasure chest, but it is almost empty: Njord’s prize for future generations is only a little more than 10 percent of its putative value.

Even if we take the fund’s worth at face value, its future is not guaranteed. In a 2011 analysis, “What Does Norway Get Out Of Its Oil Fund, if Not More Strategic Infrastructure Investment?” University of Missouri economist and Wall Street financial analyst Michael Hudson offered a stark assessment: The Norwegian oil monies are invested mainly in the unstable economies of Brazil, Russia, India and China, or in volatile real estate in the West.

Although the fund records short-term profits from its holdings of bond and stocks, its strategy is one of “speculate and diversify.” It is based on the hope that spreading the risk widely enough can hedge against a catastrophic collapse in a particular region or sector. Yet in today’s turbulent economic environment, this seems to be a strategy for multiplying exposure to speculative risks rather than protecting against them. Thus, not only does Norway’s massive debt render the fund’s true value largely illusory, the future of the fund itself is highly precarious.

The second awkward fact Norwegians have yet to confront is that their country’s disproportionate dependence on oil hangs like an economic sword of Damocles above its head. In August, the Economist predicted that following improvements in shale-gas technologies and the development of electric cars, a significant decrease in the demand for oil is rapidly approaching. Although marginally referenced in the Norwegian Finance Ministry’s most recent self-congratulatory white paper, “Long-term Perspectives on the Norwegian Economy 2013,” Norway’s administrators chose to gloss over this glaring issue, preferring the relative safety of a somewhat theoretical and speculative prognostication about the country’s economy in 2035-2060.

If technical improvements in the field of alternative energy indeed continue, and if forecasts of an imminent and substantial drop in demand for oil is correct, the consequences for Norway could be catastrophic. Its gross domestic product (GDP), today concentrated on oil and its derivatives, could collapse. Its exports will crash, and with its current massive levels of public-sector spending, the important ratio of public debt to GDP — currently at around 30 percent — will spiral, bringing the country close to default. Norway could, very quickly, find itself in a much worse economic state than it was before the discovery of oil.

The flip side of this dependence on oil provides the third major structural weakness in the Norwegian economy: The country’s non-oil industrial infrastructure has been seriously neglected. Although the election campaign yielded talk of improving it, such plans may be too little and too late. Oil and its related industries drain the labor force, driving up labor costs as relatively few hands are available for more productive sectors.

Moreover, the accountants and bankers who manage the oil fund claim that spending too much on domestic infrastructure and investments in industrial production would overwhelm the small local economy and cause inflation. Incredibly, only 4 percent of the fund may be utilized for such purposes. This compares with the 60 percent that Mr. Hudson recommends be used for direct investments in domestic and regional enterprises to ensure that the Norwegian economy is viable after the oil wells run dry.

The Norwegian people are understandably proud of the massive nest egg they think they possess. The truth hidden from ordinary Norwegians is that much of the country’s oil bounty has already been squandered. If Norway is to avoid being drawn inexorably into the abyss, it must fundamentally reassess its policies and learn the lessons of the global developments that have affected the world of finance and real estate since the 1960s.

After 50 years of complacency, time is now working against the Norwegian people. Njord is no longer smiling on them, but will they notice?

Jerome Vitenberg is an international political analyst. He has taught Political Science and International Relations for the London School of Economics and Political Science via the University of London’s International Programs.

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