Economics: Is it possible to live on oil wealth?

[Kjertesvein]

By the end of this year, the Norwegian Oil Fond will exceed 3000 billion Norwegian Kroner. In 2020, estimation with todays money will be about 6000 billion Norwegian Kroner (60 000 000 000 000 kroner). That means that each citizen is a millionar (old and young), in Kroner.


In turms of US $, we are talking about 500 US billion $ after christmas, and about 1000 US billion $ by 2020 or 166 000 US $ à citizen.

Offcourse, the state is not going for an Alaska model any time soon, which is to dividing (some of?) the money up and delivering it out. Instead the current limit of use each year have been on 4% of the surplus (iirc). Little more in financial urest, and less in good times.



Now the main question: I heard some finance folks on TV saying that Norway can live on oil money, after the oil is gone. The main thing being foreing investments. Do you think this is possible?

Additionally:

Do you think we should spend more, or will this be bad in the sence of inflation?

Do you think its safe to hold about 60% of the fund in foreign investment shares?

Do you think we should investment "ethically"?


~Wille

[Koelkastmagneet]

Doesn't it generally lead to Dutch disease if dependency on natural-resources is too high?

[Viking Prince]

166 000 US $ à citizen.

That is not going to go too far except as a small supplement to existing earned income. Also, that assumes that the population does not increase so that the wealth is spread out over more citizens.

Generally, a whole society living off of savings would not be possible in any case -- somebody has to still work. Power needs to be generated. Construction projects need to be completed. Hospitals need to be staffed. Prisons will still exist. All sorts of sales, services, and goods need to be provided. Unless you are going to go the Saudi and Gulf States route and import the labor, somebody still needs to work.

What the savings will do is to insulate the country from a balance of payments problem with imports after the easy oil exports run out.

[Sphere]

Starting with the 2020 figure of $1000 Billion; if you take a conservative investment of mostly bonds with return of 5% (after inflation) thats $50 Billion a year. Current Norway GDP is $277 Billion while government expenses are $170 Billion, so a conservative investment would not yield enough money for the government to run on. But lets consider four different alternatives...

1.) How aggressive of an investment portfolio would it require to get enough of a return to run the government? 17% which is highly aggressive even in a bull market.

2.) How long a period of appreciation using a conservative approach would it take to pay for the government? About 25 years, after which 5% of $3400 would yield $170 Billion a year.

3.) How long a period of appreciation using an aggressive approach of 10% return but then reverting back to 5%? About 13 years, after which you could cruise on 5% return.

4.) How long a period of appreciation using an aggressive approach of 10% return but then staying at 10% return to fund the government? About 6 years, after which 10% of $1700 would yield $170 Billion a year.

So simple answer to the question is no, or at least not not right away. If handled well after 2020, the fund could eventually fund the entire government but it would take ~20 years of smart investment and not spending any of it, and not expanding the government budget in the mean time. It would probably be smarter to invest it conservatively and use the return to do capital investments in infrastructure, energy, research etc. in the country to expand the base GDP.

[Viking Prince]

Starting with the 2020 figure of $1000 Billion; if you take a conservative investment of mostly bonds with return of 5% (after inflation) thats $50 Billion a year. Current Norway GDP is $277 Billion while government expenses are $170 Billion, so a conservative investment would not yield enough money for the government to run on. But lets consider four different alternatives...

1.) How aggressive of an investment portfolio would it require to get enough of a return to run the government? 17% which is highly aggressive even in a bull market.

2.) How long a period of appreciation using a conservative approach would it take to pay for the government? About 25 years, after which 5% of $3400 would yield $170 Billion a year.

3.) How long a period of appreciation using an aggressive approach of 10% return but then reverting back to 5%? About 13 years, after which you could cruise on 5% return.

4.) How long a period of appreciation using an aggressive approach of 10% return but then staying at 10% return to fund the government? About 6 years, after which 10% of $1700 would yield $170 Billion a year.

So simple answer to the question is no, or at least not not right away. If handled well after 2020, the fund could eventually fund the entire government but it would take ~20 years of smart investment and not spending any of it, and not expanding the government budget in the mean time. It would probably be smarter to invest it conservatively and use the return to do capital investments in infrastructure, energy, research etc. in the country to expand the base GDP.

3% plus inflation should be considered a long run return goal. Any greater return is compensation for greater risk. Even with a balanced portfolio such risks are not an appropriate investment for a government.

[Dr. Croccer]

Doubtful. A lot of jobs are still necessary to keep society running. And obvously such an economy will be incredibly fragile.

[Kjertesvein]

I don't mean to live off completly, offcourse, but to live on to sustain the current level and not fall down the drain of debt (like the rest of failing western countrys) or cut a in state spending.

~Wille

[roy34543]

I don't mean to live off completly, offcourse, but to live on to sustain the current level and not fall down the drain of debt (like the rest of failing western countrys) or cut a in state spending.

~Wille

If you invest it in diversifying the economy then probably yes, but the thing is once the oil wealth runs out, its not that long before the fortune thats hoarded up is worth a lot less. In the short term 20 years in a lot, but your likely to face at least 100% inflation by then, which means it will only be worth half as much assuming you dont put all the money in long-term investments.
Besides traditionally speaking you cant really treat a government as a investment bank that just takes money and invests it ad-infinitum, if theres something like a crisis or a war the government tends to use up all the money pretty quickly.
Besides in a realistic sense, 1000 billion is too much, where are you going to invest it? The only thing that can use that kind of money is governments or hundreds and hundreds of corporations put together. Neither one is probably going to give you an amazing return. Its not hard to get a 100% return on 5000 dollars over a year, but try and do the same for a million.

Also , I guess some people might not agree with me on this , but commodity wealth is a curse, its only a matter of time before someone corrupt steals from the fund or takes a cut of the profit from the oil.

[Exarch]

the norwegian kroner is fairly stable, perhaps Oslo might want to invest in other currencies like the Yen or the Euro or even gold

[Exarch]

norway's got a small population and is secluded from the rest of the world
sure, invest it and live in peace
wise ppl

[Armenum]

Countries with oil economies should definitely diversify their economy. I don't think Norway is in such a position, but there are countries (e.g. Azerbaijan, Kuwait) who to a very large extent have their wealth/economy based on oil. When the oil phase passes those countries will be in deep trouble; it's never to early to start planning for the future.