The perfect wave: an estimate of a Norwegian petroleum supercycle

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.