Why Oil Doesn’t Corrupt Norway

Oil has long been described as a curse. Nations that possess it should be among the richest in the world, yet so rarely do those riches reach the right hands. This graph, for example, shows a clear negative correlation between oil income, on one axis, and democracy, on the other. This is confirmed by a glance at the largest producers — Russia, Saudi Arabia, Iraq, the UAE, and so on. The list becomes even more striking when adjusted per capita.Small countries with large reserves, it would seem, are doomed. Except, that is, for just one strange place: Norway.See if you can identify it.On the left is a nation of 5.3 million people. Only 2.2% of its land is arable, making it extremely dependent on oil — 1.7 million barrels of which it produces every day. The one on the right is home to four-point two million people. Its land is 0.6% arable and produces 2.6 million barrels daily. Which is the authoritarian, serial human rights abuser, Kuwait, and which is ranked the most democratic country on earth, Norway? Now, you might argue liberal democracies like Norway are protected at the outset from the worst outcomes of oil. Their representative governments ensure they will never become as corrupt, lawless, or authoritarian as others. Norway is not, after all, the only large oil producer to preserve democracy and minimize corruption.Canada and the U.S. also fit into this category. But it is perhaps the only one to neither abuse nor squander its windfall. Alberta, for instance, has a similar-sized population, and both invested their petroleum earnings in sovereign wealth funds. But that’s where the similarities end. Alberta's fund is now worth $18 billion— a number that may sound impressive but only works out to about $4,000 per resident. Norway's fund, on the other hand, is Wortha massive $1.3 trillion. Divided by 5 million, that’s $245,000 US dollars per person! Assuming a $3,000 monthly cost of living in Oslo, every last Norwegian could therefore quit their job and live care-free for nearly7 years if it were all distributed. How did Norway conquer Big Oil in a way neither Canada, nor America, nor any other country in the world could? Unlike many countries, Norway was in no hurry to extract its oil in part because it didn't believe there was any. Its surveyors wrote in a memo: “The chances of finding coal, oil, or sulfur on the continental shelf off the Norwegian coast can be discounted. "And it was this patience, or, rather, disinterest, that would later give it an upper hand in negotiations.In 1959, the Dutch made a surprise discovery: what turned out to be the single largest natural gas field in all of Europe. Although most was found onshore, the field stretched all the way off the coast and into the North Sea. What if, everyone began to wonder, there was more?This possibility was especially intriguing to the British, who were left in poor financial shape after the war. Those long blue miles of nothing suddenly had everyone’s attention. There was just one problem: Who owned what? No one could agree on where one country's sovereign waters ended and another begins. And in most versions of history, this is when Norway's love story with oil would've ended.The country is surrounded by a deep, clearly demarcated trench, which the UK could've argued was the most sensible place to divide the sea — leaving Norway with only a tiny slice of the pie and one too deep to be of much use. But, as it happened, the UK was in no mood for a long, protracted border dispute adjust wanted to get drilling. So, instead, they just divided the water in half.Even better for Norway, the median line calculation included some of its 240,000 distant islands, like this one, 10 miles off the mainland. Tiny details like these would eventually generate billions of extra dollars when an oil field was discovered on the border — 85% of which is owned by Norway. With the boundaries now agreed upon, it became open season. Phillips kicked things off by drilling 32wells — all of which came up short. It seemed as though the skeptics may have been right all along — there was simply no oil to be found, and it asked the government for permission to give up. But while many countries stipulate an amount of money to be spent in exchange for drilling rights, Norway was smarter: mandating a minimum total depth. So, having not fulfilled its contract, Phillips gave it one last shot and sure enough, this final 33rd well-struck gold. Then, came the real test.With the smell of money fresh in the air, in came the American giants, who had a reputation for contributing very little to the economies they drilled in.They would drop in, take the loot, and vanish, leaving hardly a trace. Some even forbid their workers from wearing non-American-made boots. Norway was David to the oil companies, Goliath. But it wasn’t flying blind. Two major lessons shaped its approach. First, they had seen in the Netherlands how damaging oil could be to the rest of the economy. It even has a name: “Dutch Disease” — for when the local currency appreciates, lowering the country’s competitiveness — ultimately doing more harm than good. Second, its government had learned firsthand how to deal with big corporations decades earlier, when it developed the nation's vast hydroelectric grid. All of this foresight paid off handsomely. While the Americans bullied the UK into giving its companies equal treatment under the law, in Norway, the government was firmly in charge. Oil, in its mind, was not just another product to tax but belonged to the public, who could "rent” it to private companies in exchange for their help in extracting it.The conceptual starting point for taxation, therefore, was 100%, not 0. Today, oil is subject to the ordinary 22%corporate tax rate and a special tax of 56%, for a combined 78. And while the state keeps the vast majority of the profit, it does so only after a discovery is made. Private companies pay for their own exploration. Finally, the Norwegian government wisely saw oil as a means to an end, not an end itself. It never assumed, as others did, that petroleum would naturally bring jobs. It knew it would have to create them. And to do that, it needed to ensure the oil flowed through Norway. This was no easy feat. To get the oil on land, it first needed to cross the deep Norwegian trench, navigate its winding fjords, and be accompanied by remote roads, pumps, and plants. But it was also an opportunity. Just as labor-intensive manufacturing allowed Southeast Asia to quickly industrialize and shift to better, more profitable sectors, oil helped develop the wider Norwegian economy. State workers were instructed to learn from their foreign counterparts — to copy and eventually, overtake them. Today, Norwegian labor may be among the world's most expensive but it’s also among the world's best.An estimated 200,000 people, or 1 in every14 workers in the country, are employed as a result of the industry. And yet it never got carried away. Knowing full well that this non-renewable resource would eventually run out, Norway self-imposed a limit of 90 million tons each year.Patience was paramount. Not everything went smoothly. There were hundreds of helicopter crashes, diving incidents, fires, and spills. In 1980, a drilling rig capsized, killing123 people. It was a costly and tragic wake-up call to the industry’s poor regulations. And when the money first began trickling in, it wasn’t sure what, exactly, to do with it all. Between 1976 and 80, oil revenue increased by a factor of 15, which led only to inflation. When oil prices collapsed in 1986, Norway fell into a recession. Something had to change. The solution, of course, was to diversify. In 1990, it created the “The Government Pension Fund Global” — today the single largest sovereign wealth fund. It owns 1.5% of all public companies on the planet.All government oil revenue is invested in the portfolio, which helps reduce the country's dependence on oil prices. But what, you might ask, prevents a populist party from recklessly spending it all? Wouldn't voters reward politicians for distributing it today, rather than prudently saving it for tomorrow? To prevent this, it established a rule that spending can be only as high as the expected return — which today is set at 3%.Norway’s path to the present was far from perfect.Luck was also involved. But it can say what few other nations can: that it converted a short-term, finite resource into lasting, generational, and widely-felt prosperity.Critics argue oil has nevertheless distorted the economy — as felt in the country's high housing prices, or its disinterest in developing offshore wind farms, like its neighbor, Denmark.Valid as these arguments may be, they also reflect Norway’s tremendous successes. Other nations look at its problems more with envy than pity. One question, however, casts a dark shadow over the country’s achievements: Norway has no doubt been good to itself, but Has it been good to the world? After the state oil company removed the word "oil” from its name in 2018, one wonders whether Norway’s lack of ostentation — the skyscrapers of Saudi Arabia or Dubai’s skis lopes in the desert — isn’t mere modesty but actually, embarrassment. Unique among its oil peers, Norway aspires, at least, to good stewardship. Last year, 75% of new, non-commercial car sales were electric, far more than any other country.And nearly all of its electricity is derived from renewable energy — mostly hydropower. Most ironically, its oil fund refuses to invest in fossil fuel companies. Though, make no mistake: this financial strategy helps hedge against the price of oil. The central bank says so itself. All of these green initiatives may give a casual observer the impression that Norway is gradually transitioning to a post-oil economy. The truth, however, is very different. Far from slowly diminishing, production is actually expected to increase — and that's according to the government. The country’s newly-elected coalition leader has firmly rejected a complete cutoff of oil, and, like many voters, prefers a more moderate approach. Oil’s share of GDP, exports, and state revenues over time, confirm that the commodity remains a critical part of the economy, and will continue to be for many years to come. In 2006 and 10, it reached new agreements with the UN and Russia to expand its maritime zone, which is now 6.6 million square kilometers— 17 times its land area and over twice the size of India. And as Norway’s own oil melts the ice in the arctic, making exploration there easier, it will only be further encouraged to extract even more oil from it.If Norway — one of the richest places unearth, the poster boy of environmentalism, with a firsthand view of the beauty of nature, and financially secure for decades to come— feels no sense of urgency, it’s unlikely to be found anywhere else.