There are some pretty big pools of capital out there. Vanguard’s 500 Index Fund has got $97.7 billion. The TIAA-CREF’s College Retirement Equities Fund is stocked with $150 billion. Then there’s Bill Gates’ personal brokerage account. But the 4.5 million citizens of chilly, oil-rich Norway may be sitting on the biggest gusher of them all. The largely unknown Petroleum Fund of Norway was worth 940.7 billion Norwegian kroner on June 30—about $147 billion—and is growing rapidly.
When it comes to oil—and investing—it’s easy to overlook Norway. While political and social upheavals in major oil producers—Venezuela, Nigeria, Russia, the Persian Gulf—dominate headlines, Norway since 1971 has quietly been pumping massive quantities of crude from the icy waters of the North Sea. Today, Norway is the world’s third-largest oil exporter, behind only Saudi Arabia and Russia, and the seventh-largest oil producer. The Norwegians have proven that oil doesn’t have to be an obstacle to stability and long-term growth.
Political scientists like to talk about the ” ‘curse’ of oil.” Over the past several decades, we’ve seen the sorry economic state of affairs that ensues when tribal kingdoms, authoritarian regimes, kleptocracies, and left-wing dictatorships get their hands on national oil revenues. Easy oil cash entrenches corrupt establishments, discourages sound long-term economic planning, and is almost never channeled in ways that promote development. (This three-part BBC documentary explores the curse of oil.)
Iraq is on the verge of finding out whether it will succumb to the curse or defeat it. Norway offers an interesting model for the Iraqis to consider. Assuming things ever calm down, Iraq will decide how to use the nation’s oil wealth to benefit its putative owners—the long-suffering Iraqi people. More than a year ago, Steven Clemons of the New America Foundation suggested that Iraq duplicate the Alaska Permanent Fund. Established in the 1970s, the fund guarantees that at least a quarter of all oil revenues received by the state be invested on behalf of the state’s hardy residents. It has grown into a huge, highly diversified mutual fund. According to its September 2004 report, the APF has about $28 billion in assets. Each year, it pays out dividends to qualified residents—$919.84 per person. And in many ways, it’s a classically American approach—built on a concept of individual ownership and intended to spur demand and consumption. Last year, the fund injected about $581 million into the state’s economy.
Norway has pursued a classically Scandinavian solution. It has viewed oil revenues as a temporary, collectively owned windfall that, instead of spurring consumption today, can be used to insulate the country from the storms of the global economy and provide a thick, goose-down cushion for the distant day when the oil wells run dry.
Less than 20 years after they started producing oil, the Norwegians realized their geological good luck would only be temporary. In 1990, the nation’s parliament set up the Petroleum Fund of Norway to function as a fiscal shock absorber. Run under the auspices of the country’s central bank, the fund, like the Alaska Fund, converts petrodollars into stocks and bonds. But instead of paying dividends, it uses revenues and appreciation to ensure the equitable distribution of wealth across generations.
Here’s how it works. Cash flow from the government’s petroleum activities—the state owns 81 percent of the aptly named Statoil—is funneled into the fund. Last year, the total came to 91.9 billion kroner (about $14 billion). The fund then hires external managers to invest, generally using low-cost indexing strategies. It’s conservatively managed—more bonds than stocks, and investments divided equally between Europe and the rest of the world. (Here are the results of six years of active management.)
Of course, the fund’s history reveals some of the pitfalls of having socialists manage oodles of cash. The fund didn’t start to invest in stocks until 1998, thus missing out on a big chunk of the boom. In 2001, it started a sub-fund to make eco-friendly investments—good social policy, dubious asset-management strategy.
But the huge balances mean Norway can happily continue to be heavily socialist without confronting the problems that its Euro-neighbors to the south face—unemployment, high inflation, and huge national debts. Yes, fiscal budget expenditures were a whopping 38.3 percent of gross domestic product in Norway last year. But the country still runs a budget surplus. Last year, per-capita GDP was a healthy $51,755, and both unemployment and inflation are low.
In Norway, the sudden increase in oil prices has meant larger inflows to the fund and enhanced long-term welfare for its citizens. That’s not how it goes down in other big oil producing countries. In Russia, the oil boom has enriched oligarchs and increased foreign currency reserves. But the quality of life in Russia continues to deteriorate. Saudi Arabia has been pumping far more oil than Norway and for a far longer time. But its oil revenues tend to flow into the bank accounts of the royal family—not into a segregated account to benefit the public at large. As a result, the richest oil nation on earth still resembles a garden-variety poor country: a 25 percent unemployment rate, tremendous inequality of wealth and assets, a massive public debt, and an undiversified economy dependent on commodity exports.
The Norwegian economy remains heavily dependent on oil (though much less than the Saudi economy): Petroleum industries account for about 17 percent of Norwegian GDP and a hefty 45 percent of exports. But the rapid growth of the fund means Norway won’t suffer massively if the oil market suddenly tanks or if production begins to dwindle. (In 30 years, Norway has pumped about 29 percent of its total reserves.) In a land of high taxes, the fund functions as a substitute for national savings. When the government runs deficits, it’s allowed to transfer cash out of the funds. Unlike many other oil-dependent economies—like Russia and Saudi Arabia—Norway won’t have to alter spending habits dramatically if revenues suddenly decline.
Of course, Iraq isn’t directly analogous to Norway—any more than it is directly analogous to Alaska. And I’m sure most Iraqis would rather have a dividend check than see their oil wealth pile up in a vast investment pool. But Iraq has endured enough internal and external shocks in the past few decades. Maybe the shattered nation needs a fiscal shock absorber more than a gift certificate.