Reports 2013/57

Effects of increased demand from petroleum and increased spending of oil revenues 2003-2012

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In 2003, a cyclical downturn was reversed to upturn in the Norwegian economy, partly as a result of rising oil prices. An important channel for the petroleum industry’s influence on the Norwegian economy is the industry's demand in terms of labour, capital formation and intermediate input. From the late 1990s, the rise in oil prices contributed to that the fall in demand from the petroleum industry in the years 1999-2002 turned into a sharp rise. The growing and eventually high oil prices contributed to increase the government's oil revenues. In 2001, it was broad support in Parliament for a fiscal rule for the use of public "oil income" in the Norwegian economy. Despite the financial crisis and the subsequent strongest global economic downturn since the Second World War, the Norwegian economy in the years 2003 to 2012 have generally been characterized by relatively high growth and low unemployment.

This study aims to quantify what the increased demand from the petroleum industry and the increased use of "oil revenues" over government budgets have affected imported macroeconomic variables in the last decade. The study shows that each of these two expansive impulses have had about the same influence on the Norwegian economy. According to the calculations, a fifth of the growth in mainland Norway from 2002 to 2012 could be attributed to these two factors. Without these the average annual growth in mainland Norway would have been 2.2 percent, not 2.8 percent as it actually was. The impact on total employment is somewhat larger: 105 000 of the actually increase in the employment of 345 000 persons can be attributed to the increase in the demand from the petroleum industry and spending of oil revenues.

The calculations are done using Statistic Norway’s large scale macroeconometric model KVARTS. In this model the outcome of the wage settlement in manufacturing industries sets the standards for wage determination of other sectors. The wage level in the economy is primarily determined partly by the profitability of the manufac¬turing industry, partly by the rate of unemployment. Higher activity in the petroleum industry affects both the profitability and the labour market pressure. Via equilibrium mechanisms in the wage formation, wages in both manufacturing industry and in the rest of the economy increases. Public spending normally has little direct effect on profitability in manufacturing industries, beyond its effect through labour market pressure. Therefore, the increase in activity in the petroleum sector contributed far more to the overall wage growth than the increase in the spending of oil revenues.

Impulses from the petroleum industry directly and through government budgets have had significant positive effects; higher consumption and wages and lower unemployment. But they also contribute to weaken the cost competitiveness by making the wage costs higher and the Norwegian krone stronger. This has resulted in lower activity levels in other exposed sectors than otherwise would have been the situation. This probably implies that Norwegian economy has become less diversified and less resistant to adverse economic shocks. On the other hand, the high government saving helped giving the government substantial financial reserves that made the fiscal policy more robust, which we experienced during the financial crisis. While fiscal policy in other countries has reinforced the decline, Norwegian authorities have been able to stimulate the economy in the worst parts of the downturn, without having to reverse the policy afterwards.

Increased wealth, as the increased oil revenue represents, leads us to demand more services and products for both public and private consumption. As part of the services can not 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 producing more sheltered products. Some of the increased labour demand has indeed been covered by increased labour supply by Norwegians and increased immigration. According to the calculations the two impulses increased labour supply by 55 000 persons up to the end of 2012. This increase is partly caused by increased participation rates and partly to immigration, that according to the calculations overall increased by almost 25 000, compared to what otherwise would have happened.

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