Effects of increased petroleum sector demand and increased oil spending 2003–2012
The increased demand from the petroleum sector and the increase in the spending of “oil revenues” has had a major impact on the high economic growth over the past decade; it has increased employment and reduced unemployment. It has also diminished cost competitiveness and thereby reduced activity in traditional exposed industries.
In 2003, the downturn in the Norwegian economy was reversed to an upturn, partly as a result of rising oil prices. An important channel for the petroleum sector's impact on the Norwegian economy is the industry's demand in terms of labour, capital stock and intermediate input. From the late 1990s, the rise in oil prices contributed to the fall in demand from the petroleum sector in the years 1999-2002 turning into a sharp rise. The increasing and eventually high oil prices contributed to higher oil revenues for the government. In 2001, there was broad support in Parliament for a rule for the explicit introduction of "oil revenues" in the Norwegian economy. Despite the financial crisis and the subsequent and strongest international economic downturn since World War II, the Norwegian economy generally experienced relatively high growth and low unemployment from 2003 to 2012 compared to other countries.
Petroleum sector and ”oil revenues” have pushed up GDP and employment
This study aims to quantify how the increased demand from the petroleum sector and the increased structural non-oil public deficit have impacted some macroeconomic variables in the last decade. The study shows that these two expansive impulses have, individually, had roughly the same impact on the Norwegian economy. According to the projections, a fifth of the growth in mainland Norway’s GDP from 2002 to 2012 is attributable to these two factors. Without these, the average annual growth in mainland Norway’s GDP would have been 2.2 per cent, not 2.8 per cent as it actually was. The impact on total employment is somewhat greater: 105 000 of the almost 345 000 increase is attributable to the increase in both the demand from the petroleum sector and oil spending.
Higher wage growth due to increased petroleum activity
The projections are done using Statistic Norway’s quarterly model KVARTS. In this model, the outcome of the wage settlement in manufacturing industries sets the standard for setting wages in other sectors. The wage level in the economy is primarily determined by the profitability of the manufacturing industry and by the pressure in the labour market. Higher activity in the petroleum sector affects both the profitability and the labour market pressure. Through equilibrium mechanisms in wage determination, wages in both the manufacturing industry and in the rest of the economy increase. Other than its effect via labour market pressure, public spending normally has little direct effect on profitability in manufacturing. The increase in activity in the petroleum sector has therefore contributed far more to the general wage growth than the increase in oil spending.
Traditional exposed industries weakened
The impulses from the petroleum sector, both directly and through government budgets, have had significant gains, partly in relation to higher consumption, higher wages and lower unemployment. However, they have also played a role in diminishing cost competitiveness by pushing up wage costs and strengthening the Norwegian krone. This has resulted in lower activity levels in exposed sectors - other than those that are primarily aimed at the petroleum sector. This means that the Norwegian economy has become less diversified and less resistant to adverse cyclical shocks. On the other hand, the high government saving has helped make the fiscal policy very robust, which we experienced during and after the financial crisis. While the fiscal policy in other countries has gradually reinforced the downturn, the Norwegian authorities have been able to stimulate the economy in the worst periods of the downturn without subsequently having to reverse the policy.
Labour supply increased by 55 000
The increased wealth that the higher oil revenues represent, means that we demand more goods and services for both public and private consumption. As some of the services stem from the sheltered sector – products that cannot be imported from abroad – it is almost an inevitable consequence that resources are transferred from traditional exposed industries to both petroleum-related industries and industries that cover the higher demand for sheltered products. Some of the increased demand for labour is also covered by increased labour force participation and immigration. According to the projections, the two impulses increased the labour supply by 55 000 persons up to the end of 2012. This growth is partly related to the higher labour participation rates and partly because immigration, according to the projections, saw an overall increase by almost 25 000, compared to what would otherwise have been the case.