Petroleum sector’s impact on the Norwegian economy and wages – future downsizing and sensitivity to oil price shocks
The use of oil revenues and petroleum sector demand will continue to be central to the Norwegian economy. This report presents projections up to 2040 and gives estimates of the macroeconomic effects of a large and sudden fall in oil prices.
The petroleum sector and its related activity is vast, despite the fact that extraction has slowed since its peak almost ten years ago. Demand from the industry is likely to continue to show further growth for a number of years, while extraction is set to remain stable for another ten years. A moderate declining trend in demand from the petroleum sector is expected to start in about five years’ time. Extraction is not expected to fall until the 2020's, but this fall will continue up to 2040. Combined with the aging population, these two elements will undoubtedly have an impact on the future of the Norwegian economy.
Using the macroeconometric model MODAG, developments in the Norwegian economy have been projected up to 2040. Demand for goods and services from the petroleum sector are expected to halve during the period 2015-2040, resulting in an annual reduction in demand equivalent to 0.4 percentage points of mainland Norway’s GDP. The fiscal policy is expected to follow the practice of recent years, with a structural non-oil public deficit close to 3 per cent of the Government Pension Fund Global, for some time to come. A moderate improvement is expected in the standard and contribution ratio of publicly funded welfare measures throughout the projection period. This will lead to expansive impulses from the national budget in the order of 0.2 percentage points of mainland Norway’s GDP per year for almost 20 years, followed by neutral impulses. Real growth in public sector pensions and benefits will take up a large portion of the room for manoeuvre in the fiscal policy going forward, and the need for health care services will gradually see a strong increase.
Lower GDP growth per capita in baseline scenario
The report focuses on the long-term trends in a baseline scenario, which describe a balanced economic development in Norway going forward. The demographic development is curbing the economic growth per capita. From 2012 to 2040, GDP excluding the petroleum sector will grow per capita on average by 1.2 per cent per year; 0.5 percentage points lower than the last 15 years. Total consumption per capita is expected to grow by about 0.5 percentage points more per year than the GDP excluding the petroleum sector, partly due to increased financial income as a result of growth in the Government Pension Fund Global.
Impact of lower oil prices resulting from fall in international demand
A large and sudden fall in petroleum sector demand will lead to much greater challenges for the economy than in the baseline scenario. The report analyses the effects of a fall in global demand from 2015, which quickly leads to a permanent reduction in oil prices from 94 to 63 USD/barrel in 2015 prices. The Norwegian economy will consequently receive many negative impulses simultaneously. While the global downturn affects the Norwegian economy almost immediately, it takes slightly longer for the petroleum sector demand to fall in earnest. As a result of reduced revenues from both the oil industry and ordinary taxes, a more restrictive fiscal policy will be applied. A more restrictive policy from 2017, whereby only the standard and coverage ratio is maintained in welfare measures, and low growth in public investment combined with a modest tax increase is more than sufficient to follow the fiscal rule. Towards the end of the projection period, however, the taxes must be raised in order to keep pace with the 4 per cent path.
Even without an active counter-cyclical fiscal policy, the increase in unemployment is limited to 1.4 percentage points, and the GDP excluding the petroleum sector is at most about 6 per cent lower than in the baseline scenario. Initially, manufacturing will be hard hit, and the biggest impact will be in the fourth year after the fall in international demand. Value added will then be almost 10 per cent lower than in the baseline scenario. Lower profitability combined with reduced pressure in the labour market will contribute to lower wage growth. The improvement in cost competitiveness relative to the baseline scenario that this entails, is also related to the weakening krone. This will lead to Norwegian exporters losing market shares to a much lesser degree than is the case in the baseline scenario. Thus, value added in manufacturing will be almost 9 per cent higher than in the baseline scenario towards the end of the projection period.
Impact of a supply-generated fall in oil prices
The effects of a price fall due to a positive supply shock in energy markets were also analysed. In such a scenario, the activity in non-oil-producing countries will be stimulated. This will raise the international demand for other Norwegian export products, thus counteracting the initial negative impulses. This means that the effects will generally be less for Norway than in a demand-driven oil price shock.