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The perfect wave: an estimate of a Norwegian petroleum supercycle

Devold, Kristine A.; Wiksnes, Runar
Master thesis
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URI
http://hdl.handle.net/11250/2383923
Date
2015
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  • Master Thesis [4656]
Abstract
Over the last decades, the relationship between natural resource discoveries on macroeconomic

development has been thoroughly debated. The importance of maintaining a sustainable

development in mainland industries has made this a topic of interest for both economists and

regulators. This master thesis aims to examine and quantitatively assess how the Norwegian

economy has been affected by the evolution of its petroleum sector. We also relate our findings to

earlier contributions on this topic from both theoretical and empirical literature.

We examine the effect of the petroleum industry on the Norwegian economy by conducting two

comparative analyses. First, following a theoretical two-sector model, we compare the impact of

booms and busts in oil prices on macroeconomic variables in two resource economies, Norway

and Australia, and a non-resource economy, Sweden. Generally, we find that the predicted

dynamics can be identified in the resource economies, but that these responses have changed

through time. Notably, the introduction of a floating exchange rate has allowed the real effective

exchange rate to respond to oil price fluctuations, thus shielding the remaining economy. Other

institutional effects, such as the Norwegian fiscal rule, sovereign wealth fund and a well-defined

monetary framework might also have contributed to this effect.

Second, we build a counterfactual scenario in which Norway did not discover petroleum. This is

done by means of a synthetic control method, creating a synthetic Norway from 1972, using nonpetroleum

producing OECD countries. We find that Norwegian GDP per capita has been an

average of 15.6 % larger than what it would have been in the absence of petroleum resources.

Norwegian mainland industries have suffered an average loss in production of 12.4 % of

mainland GDP relative to the counterfactual scenario. We hypothesize that the latter is owed to

forfeited capital investment and real effective exchange rate effects. Furthermore, we find a

petroleum-driven supercycle in the Norwegian GDP per capita, peaking already in 1998,

suggesting that the contraction-phase is more mature than previously assumed. Although political

priorities in favour of the petroleum industry have been beneficial, the generated revenue streams

and returns on investment have crowded out parts of the mainland industries. This has

implications for adjustments in the coming years, when the petroleum industry is phased out. We

discuss briefly some scenarios for this adjustment process, and conclude.

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