For more than four decades, the UK actually produced more oil than Norway. The trouble is that whilst Norway has gone on to establish the world’s largest sovereign wealth fund at well over a trillion dollars and owning a staggering one and a half percent of all shares on the planet, the UK on the other hand, well it has little to show for it.
But why? Why did the two nations take such different approaches to their oil wealth? And why has the Norwegian state earned more than double per barrel of oil equivalent than its UK counterpart?
The oil and natural gas riches of both countries lay literally side by side beneath the North Sea. An area where offshore exploration and production started in the 1960s but only really took off in the late 70s and early 80s.
During the late 70s, the prospects of large-scale North Sea oil wealth came to the attention of UK Prime Minister James Callahan. Yet, it’s fair to say that future prospects weren’t top of the economic agenda.
You see, the UK economy was facing high inflation, unemployment, and somewhat ironically fuel shortages which plagued the 70s. Whilst oil revenues were rising, they were still fairly small. But all that was about to change.
The early 80s saw the UK reach peak oil and gas worth more than 3% of GDP per year at its height or an estimated 45 billion pounds at today’s prices. A windfall which coincided with the government of Margaret Thatcher, a controversial economic figure who oversaw the restructuring of the UK economy during the era of deindustrialization. An expensive undertaking which is where the newfound oil wealth became very useful, generating 166 billion pounds for the government over the 80s. Helping to cover some of the cost of not only the economic restructure, but also allowing large tax cuts.
For example, the higher rate of tax decreased from 60% to 40% whilst short-term consumerist policies, like mortgage tax relief and housing subsidies were pursued.
In contrast, Norway took a very different approach. Although it didn’t face the same economic pressures as the UK at the time, the economy wasn’t anywhere near as wealthy as it is today. Based with large revenues, relative to a small economy, the Nordic nation focused on ensuring its oil windfall would have a long lasting impact benefiting future generations.
So in 1990, it established the government pension fund. Now considered to be the largest sovereign wealth fund in the world and up until today, each year’s surplus oil revenues are transferred into the fund.
Though these deposits account for less than half of the fund’s value, most of the returns are actually produced through the funds overseas investments done to prevent Norway’s small domestic economy from overheating with only a small proportion transferred back to the government each year to ensure long-term sustainability. But these transfers are still equivalent to approximately 20% of all government spending.
As for the UK, well, had the country followed a similar strategy, the fund could be worth over 500 billion pounds today. Though to be fair, investing most of it in an oil fund may not have been realistic.
A 2008 study suggested that investing half of its wealth into a fund would have still led to a 200 billion pound spending pot, larger than most sovereign wealth funds and not far behind Norway’s at the time.
However, despite the billions actually generated, Norway has received more than two and a half times the revenue per barrel than the UK has. Receiving $29.80 dollars in state revenue compared to the UK’s $11 dollars at 2014 prices.
This is down to three main reasons.
Firstly, is the timing when the countries extracted most of their oil. Given that timing in a volatile market is often crucial, the UK produced more when prices were low. Reportedly extracting two thirds of all its oil when prices were below $50 dollars a barrel compared to just over half for Norway.
Secondly, the UK has simply applied less tax, accounting for an estimated half of the difference in revenue per barrel. A key reason for this, is the UK routinely reducing taxes on extraction as oil prices fell over time including to zero percent on certain fields from 2016, focusing more on corporation tax and supplementary charges which have led to less revenue on average.
And finally, unlike Oslo, London doesn’t own a stake in the companies extracting the oil. Widespread privatization provided a short-term boost to public finances. But this was at the expense of a share of the equity and dividends generated by the extracting companies.
The Norwegian state on the other hand, kept a firm hold on upstream companies like Statoil, meaning that whilst Norway benefits from both higher taxes on production, and share in state-owned companies, the UK is limited to the taxes raised.
Not to mention, the much higher proportion that Norway exports compared to the UK’s domestically driven consumption. Going a long way to explain the differences and how much wealth was created. Unfortunately, even given the extreme volatility in oil prices over time, the opportunity presented by North Sea oil may have passed, at least for the UK where state revenues have underperformed forecasts nearly every year for the last decade.
We are actually below zero for two of those years due to tax rebates and set to be no greater than a billion pounds a year at most until at least the mid-2020s. A very long way from the peak oil of the mid-80s.
So overall, the UK’s lost oil wealth is as much a product of how much actually found its way into the state’s piggybank as what was done with it.
To be fair, the UK has a much larger population than Norway which would have limited the magnitude of any impact. Having also faced a different set of economic pressures when revenue started flowing.
Yet like many, we can’t help but wonder what if even a small percentage of that oil wealth was used for a fund. Would the UK have ended up buying half of Norway’s prime retail or even a top division Norwegian football team. We will never know.