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Could Norway's oil and gas fund inspire financial prosperity in Britain?

16-10-2013

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Oil and gas have played a huge part in Norway's success story, which after years of good fortune now stands as one of the wealthiest countries in the world. While success in this area partly rests on chance in the exploration stages, revolutionary tactics and a degree of sensible thinking are behind Norway's rise to the top. 

While most of Europe is looking to reduce spending in the face of austerity, Norway now has more than enough money to put into projects that will help set the country up for generations. The key differentiator here is Norway's sovereign wealth fund, which could be worth a staggering $1 trillion (£0.6 trillion) by 2020.

This gives the country the luxury of being able to sit through times of turbulence rather than having to authorise radical action in the wake of the latest financial setback. So how has this grown to become the case?

What is it?

The proverb 'You have to spend money to make money' tells the tale of Norway's journey to the top. Commonly referred to as the Oil Fund but known officially as the Government Pension Fund, this is an account into which surplus wealth produced by Norwegian oil income is deposited.   

The idea was to protect Norway from fluctuating oil prices and ensure the country continued to benefit from fortunate events many years after they've happened.

Money is generated from the country's ownership of petroleum fields, taxes on oil and gas, as well as the government's 67 per cent stake in Statoil, Norway's largest energy company. This means that rather than racking up huge amounts of debt by spending money it doesn't have, the Norwegian government has been able to build up enough wealth to help keep the country going long after its oil and gas reserves run out.

Profits from the oil industry give the government oil fund $1 billion a week, with this money going on anything from building projects to purchasing shares in small, medium and large companies. More recently, the country purchased shares in Facebook when the social network announced its float on the stock market.   

Through growth in the country's flourishing oil and gas industry, the fund's value rose by 13.4 per cent last year - its second-best performance ever. So, the question European governments should be asking themselves is whether a similar fund would work in their own countries.   

As for Britain?

Will it work in Britain? Well, Norway prime minister Jens Stolenberg certainly seems to think so. He says indebted European nations should follow the example of his country by placing their oil revenues in a sovereign wealth fund.

That way, according to Mr Stolenberg, "the fund lasts forever". He believes too many European countries are spending money they don't have in order to boost growth in certain areas. However, by doing so they are putting themselves in financial jeopardy.

Britain did actually hold significant oil and gas funds during the North Sea oil boom, but successive governments spent their takings on cutting national borrowing and keeping down taxes. Everything went into the day-to-day running of Britain and it wasn't long until the nest egg was spent.

Unfortunately the North Sea oil is now well past its peak and there's little chance of Britain managing to build up a new fund to match the strength of Norway's. Still, if the government lowered its expectations for how much this could potentially generate, there would be hope for a sustainable fund yet.

The Shetland Islands used oil from Sullom Voe to build up a fund of its own, which after years of upgrading roads and ferry terminals still stands at £185 million. Norway's oil fund riches may never be matched, but that's not to say its story can't serve as inspiration for something smaller.

Author: Richard Towey

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