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ECONOMY

EXPLAINED: Why is Norway such a wealthy nation? 

Norway is widely considered to be one of the wealthiest countries in the world, but why is the country so rich and where does the prosperity come from? 

EXPLAINED: Why is Norway such a wealthy nation? 
Norway is one of the wealthiest countries on earth, but why? Picture from Jan-Rune Smenes Reite on Pexels

How wealthy is Norway?

Many believe that Norway was a relatively poor country until discovering oil and gas in the North Sea.

This may be a slight misconception, however, as in the 19th century, Norway’s wealth was, in fact, on par or slightly above average compared to the rest of Europe at the time

However, Norway was certainly behind its neighbours Sweden and Denmark, until recently, in terms of wealth. 

“Before oil, in the 1960s, Norway had an income some 10 to 20 percent below our neighbours Denmark and Sweden,” Professor Halvor Mehlum from the economics department at the University of Oslo tells The Local. 

Today, however, things are slightly different, with Norway’s income now between 10 to 20 percent higher than its two neighbours, according to the professor

Norway is currently the sixth richest country in the world when measured by GDP per capita. Norway’s GDP per capita is around $69,000, according to IMF estimates

Neighbour’s and Sweden and Denmark both make the top 20 with GDP’s of  around $55,000 and $61,000 respectively. 

The top three wealthiest countries in the world in terms of GDP per capita are Luxembourg, Singapore and Ireland with GDP’s off $122,000, $102,000 and $99,000 according to the IMF’s data.

The poorest countries in the world are Somalia, South Sudan and Burundi whose GDP per capital are all below $1,000.

Why is this? 

As many of you will have guessed by now, oil has played a pivotal role in Norway’s wealth.  

“Black gold” has been crucial to the Norwegian economy for three reasons, according to professor Mehlum.

“Oil is important for three main reasons. Firstly, it has provided an important income to the Norwegian economy, both public and private. Secondly, it has provided export earnings that can pay for imports. Third, it has brought an entire industry that is very productive,” Mehlum explains.  

However, while oil has played a large part in the development of Norway’s economy, it isn’t the sole reason Norway is so well off.  

“Norway is rich today because of the well-educated labour force, productive public and private sectors, and rich natural resources. In addition to this, Norway can buy goods at low prices from the international markets, such as garments, and sell goods at high prices, such as salmon,” Professor Mehlum explains. 

It isn’t Norway’s income from oil that has contributed to the Nordic country’s wealth, instead what the Scandinavian country has done with the income. 

Norway puts its oil revenues into the Government Pension Fund, the largest sovereign wealth fund in the world. In simple terms, the Government Pension Fund, or oil fund, is a giant savings pot that makes its money by investing in more than 9,000 companies all over the globe. 

The fund is valued at around 11 trillion kroner or 1 trillion dollars. You can see the real-time value of the fund here on the Government Pension Fund’s website.

READ MORE: Norway taps oil wealth to cushion Covid impact 

The wealth fund is an essential source of funding for the government, with around every fifth kroner of government spending coming from the oil fund. Without the fund, the government would have to dramatically lower its spending or raise taxes across the board, according to Mehlum. 

Beyond material wealth, the oil fund also plays a part in Norway’s societal wealth, with money from the fund being invested into health, education and welfare. 

Norway is the sixth happiest country on Earth, according to the UN’s World Happiness Report for 2021, thanks in part to its well-funded welfare, education and health systems making it not just one of the wealthiest countries in the world but also one of the happiest. 

Will Norway stay wealthy as oil and gas are phased out 

This is the elephant in the room when discussing Norway’s vast natural resources. What will happen to the economy when the oil and gas run out or are no longer needed? 

The economy will be in for a massive shakeup once the oil wells run dry or demand drops as the world looks to greener energy. 

“When Norway stops producing oil at current high prices, the economy is in for a serious transformation, as high paying jobs will disappear, profitable businesses will also disappear, and important tax income will disappear,” Mehlum points out. 

“The fund will cushion part of this transformation. Not least because the government can continue using the fund even as the oil taxes go down,” he added. 

How well the fund is managed and the success of its thousands of investments will also play a huge factor in determining whether Norway will remain rich in the future. 

“If the returns in the stock and bond markets remain at current levels, then the fund will be important for many years to come. If the returns drop drastically, then the fund will be gone in a generation,” Mehlum explains. 

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ENERGY

Norwegian electricity rates set new record: Why are prices still going up? 

Monday will see the highest daily energy price recorded in parts of south Norway, with steeper costs forecast throughout the colder winter months. 

Norwegian electricity rates set new record: Why are prices still going up? 

On Monday, the NO2 energy region (covering southern Vestland, Rogaland, Agder, Telemark and old Vestfold) will see a daily price of 5.35 kroner per kWh and a maximum price of 6.08 kroner per kWh between 6-8pm, according to figures from energy exchange Nord Pool. 

The daily price for NO2 is a record, with the previous highest price coming last Thursday. In addition, the peak hourly price has only been higher twice, once in March and once again in December. 

Several other areas will also have their most expensive day of the year for energy on Monday. The Oslo area (NO1) and Bergen area (NO5) will see prices of 3.89 kroner per kWh- the second most expensive day on record for the cities. 

Record prices have been a mainstay over the past year in Norway, and prices could rise even more this winter, according to a forecast from energy firm Gudbrandsdalen Energi. 

“Based on our recent price forecasts, we estimate that electricity prices in the southern part of Norway will continue to remain at an abnormally high level and rise further,” the firm wrote on its website

“The winter months of January and February are now likely to be the most expensive months, with prices around five kroner /kWh excluding VAT. Including VAT, this gives an electricity price of around 6.25 kroner/kWh. These are the months we use the most electricity in Norway,” the forecast added. 

There are several reasons why the price will continue to rise. One of the main factors is record-low filling levels in Norwegian reservoirs. The level of filling of Norway’s hydropower reservoirs in parts of the country remains at a record low, which adds to concerns. In the east and south-west Norway, the filling rate hasn’t been lower in the last 27 years.

READ ALSO: What would energy rationing in Norway look like? 

In Norway, electricity production is dependent on hydropower. Therefore, there needs to be enough water in the reservoirs to have sufficient energy through the winter- otherwise, the country will need to import much pricier power from the continent. Essentially, record low filling levels will lead to record high energy prices. 

Additionally, the war in Ukraine has created uncertainty in the European energy market, which has contributed to high gas prices. Despite Norway being reliant on hydroelectric power, uncertainty surrounding gas can be felt in the Nordic country as it is connected to the European energy market via cables that transfer electricity. 

“Therefore, the prices are a lot higher in the Oslo area, the Bergen area, and the southern market zones (than in the north). These are connected to the UK and Germany by cables, so we see the influence of European prices feeding into Norwegian prices there,” Nathalie Gerl, the lead power analyst at Refinitiv, told The Local previously. 

High energy prices are an issue that is only affecting the south of Norway. In the north, energy prices are much lower, as reservoirs are filled to higher levels, and the area is producing more energy than it needs. 

However, Norway doesn’t have the infrastructure to move large quantities of power from north to south to help alleviate high prices.

“As you know, there are five electricity price zones in Norway, and there are extreme price differences between the north and the south. The electricity price in Northern Norway is pretty low, but the transmission capacity isn’t large enough, so all the excess hydropower can’t be sent to the south,” Gerl previously explained to The Local. 

As a result, energy from the north is often exported to north Sweden before it is moved south and imported back into Norway. 

“It is often the case that power is exported from northern Norway to northern Sweden and imported from southern Sweden to southern Norway, and lately it has at least been like that,” Ann Myhrer Østenby from the Norwegian Water Resources and Energy Directorate (NVE) told public broadcaster NRK earlier this month. 

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