The One Good Oil Nation

The annual COP 28 gathering is over, and it’s about time. As Robinson Meyer writes here at Heatmap, many important things came out of the conference, despite the utter joke of holding it in a notorious oil dictatorship — the United Arab Emirates — with the head of that country’s state oil company serving as president.

Yet another major oil-producing country at the conference was consistently on the right side of climate, namely Norway. The Norwegian delegation advocated for aggressive climate action, including a large energy transition fund to be focused on the poorest countries, announced millions in new investment to protect the rainforest in Brazil and for disaster insurance in Africa. Most importantly, it consistently pushed for a final agreement to phase out the use of fossil fuels. “It is not enough to say 1.5, we have to do 1.5. We have to deliver accordingly,” said Foreign Minister Espen Barth Eide. Saudi Arabia, Russia, and China opposed this language. Eventually the conference settled on an agreement to “transition away from” rather than “phase out,” which while disappointing is better than nothing.

Why didn’t Norway side with its fellow oil-producing nations? The reason is decades ago, it approached its oil reserves wisely, both economically and politically. This has allowed it to enjoy the benefits of oil without becoming an oil-addicted petrostate.

On the economics, Norway has taken a frankly socialist approach. When the North Sea oil deposits were discovered in the 1960s, it did not simply sell off the rights to a private company. Instead the government declared the deposits the collective property of the Norwegian citizenry and founded a state-owned company, Statoil (now Equinor). That in turned hired Mobil to teach it how to build an offshore drilling platform, built up its own expertise from there, and is now one of the biggest offshore drilling companies in the world. The company was formally sold into the stock market in 2001, but the government still owns more than two-thirds of the shares. It’s a perfect example of that typically Nordic combination of idealism and extreme technical expertise.

A corollary of its state-led oil development is what Norway does with the resulting revenue — it invests it in a social wealth fund. The primary point of this is to avoid “Dutch disease,” in which a country experiencing a resource boom sees a movement of labor into the resource sector, as well as an influx of foreign currency. The labor shift increases costs for other industries, while the foreign currency pushes up the value of the domestic currency, making exports less competitive. This effect is why big oil-producing nations tend to experience deindustrialization.

Norway was already quite wealthy when it discovered oil, and the government wanted to preserve its industrial base, and did not want to become dependent on the wildly gyrating global market price of oil. So instead of spending the revenues on subsidies for the citizenry, or on the government budget, it invested the proceeds in the Government Pension Fund Global. This fund has become truly colossal over the years, with some $1.4 trillion in it — representing about $255,000 for each Norwegian citizen.

As Matt Bruenig points out at The People’s Policy Project, if you impute Norway’s state-owned wealth to individual Norwegians (which makes sense given that Norway is a healthy democracy), then the share of wealth owned by the top 1 percent falls from 53 percent to 27 percent, making it arguably the most equal country in terms of wealth in the world.

Incidentally, Norway’s experience provides an important lesson for other countries that hit upon resource strikes, whether it’s oil in Guyana or lithium in Chile. A sudden surge of resource revenues sounds like a lucky break, but it can do serious damage to your economy if you aren’t careful. Just look at Venezuela, which was devastated when the price of oil collapsed in 2014 (though that wasn’t its only problem). You can spend the first few checks on needed infrastructure upgrades, of course, but over the long term you want to sock the money away into a diversified investment portfolio that doesn’t ruin the rest of your economy and can provide reasonably predictable returns over the long term.

But another point of the state investment model is political. Oil is quite profitable, and if private companies are getting the money, a nation will see a marked increase in inequality, and develop a class of ultra-rich people with concomitant distorting effects on politics. Oil billionaires (like Charles Koch or Tim Dunn) are notoriously reactionary even by billionaire standards, and that’s saying a lot. It may have something to do with the fact that, as a rule, oil company owners neither create, nor discover, nor work to produce the oil that makes them so fabulously rich (that would be nature, scientists, and workers respectively), and so cultivate a snarling hatred of taxation and government regulation to compensate for so plainly not deserving their wealth.

Whatever the case, oil magnates have vast funds for lobbying, which they use to attempt to capture the state for their own purposes — again, just look at America, or Canada. An extreme case of oil capture can be seen in Saudi Arabia or the U.A.E., which have wealth funds formally similar to Norway, but being dictatorships, ended up with governments actually constituted of oil billionaires, as if North Dakota was a hereditary monarchy.

The relative lack of oil influence also helps explain why Norway has set up one of the more aggressive decarbonization programs in the world. Now, its electricity sector has long been mostly decarbonized already thanks to tremendous hydropower resources, but that has made its crash transition away from oil-powered transportation all the more effective. Using a combination of subsidies and hefty, increasing taxes on gas- and oil-powered vehicles, the government has ensured that fully 80 percent of cars and trucks sold in Norway today are EVs, and that figure will continue to increase. Much work remains to be done (and EVs, while an improvement, are no magic bullet) but Norwegian carbon dioxide emissions per person plateaued in the late 90s and have since fallen by about a quarter, to 7.5 metric tons (or about half the American figure).

And this has been done with full knowledge that moving away from oil will mean substantial economic pain. A plan the government first adopted in 2019 faced the fact squarely: “Growth will have to take place in sectors where there is no economic resource rent. This means that tax revenues will be lower and companies cannot expect as high a return on their capital as in the petroleum sector.”

Saudi Arabia and the U.A.E., of course, depend heavily on oil and gas for energy, and produce truly eye-popping emissions.

Now, I shouldn’t exaggerate the greatness of Norway here. Equinor has had its share of spills and scandals. And of course, it would have been better if humanity had never used oil in the first place. But for the time being, humanity needs oil to function, and Norway has provided that oil in about the least-damaging way imaginable — not least because now that the world must wean itself off fossil fuels, Norway is both able and willing to turn off the taps.