In my earlier post on March 11th , “Alberta Bitumen Bubble and the Canadian Economy: An Industry Analysis Case Study,” I reported the stark facts of Canada’s current economic crisis as announced by Canada’s Minister of Finance, Jim Flaherty, and Alberta Premier Allison Redford, directly resulting from pricing forecasts for “Western Canada Select” (WCS) from the oil sands. In that post I also explored the now well-established economic conundrum known as the “natural resource curse.” This simply means that economies that rely heavily on natural resource exploitation, have historically underperformed more diverse economies. This is now most certainly the case in Canada.
In another excellent Globe & Mail article published May 16th, the author details how Norway dealt with its “natural resource curse,” and has diversified its economy with the government proceeds of its oil wealth. By contrast, Canada’s current Conservative government prefers a laissez-faire approach to the future, taking no action. In the opinion of most economists who monitor natural resource based economies, this is a recipe for disaster in Canada. So again the discussion question is: in such a situation, what would you do to address this crisis for the Canadian economy?
When oil was discovered in the Norwegian continental shelf in 1969, Norway was very aware of the finite nature of petroleum, and didn’t waste any time legislating policies to manage the new-found resource in a way that would give Norwegians long-term wealth, benefit their entire society and make them competitive beyond just a commodities exporter. “Norway got the basics right quite early on,” says John Calvert, a political science professor at Simon Fraser University. “They understood what this was about and they put in place public policy that they have benefited so much from.”
This is in contrast to Canada’s free-market approach, he contends, where our government is discouraged from long-term public planning, in favour of allowing the market to determine the pace and scope of development.
“I would argue quite strongly that the Norwegians have done a much better job of managing their [petroleum] resource,” Prof. Calvert says.
While No. 15 on the World Economic Forum’s global competitiveness rankings, Norway is ranked third out of all countries on its macroeconomic environment (up from fourth last year), “driven by windfall oil revenues combined with prudent fiscal management,” according to the Forum.
Before oil was discovered, the Act of 21 June 1963 was already in place for managing the Norwegian continental shelf. This legislation has since been updated several times, most recently in 1996, now considered Norway’s Petroleum Act, which includes protection for fisheries, communities and the environment.
In 1972, the government founded the precursor of Statoil ASA, an integrated petroleum company. (In 2012, Statoil dividends from government shares was $2.4-billion). In the same year, the Norwegian Petroleum Directorate was also established, a government administrative body that has the objective of “creating the greatest possible values for society from the oil and gas activities by means of prudent resource management.”
In 1990, the precursor of the Government Pension Fund – Global (GPFG), a sovereign wealth fund, was established for surplus oil revenues. Today the GPFG is worth more than $700-billion.
While there’s no question that Norway has done well from its oil and gas, unlike many resource-based nations, Norway has invested its petro dollars in such a way as to create and sustain other industries where it is also globally competitive.
The second largest export of Norway is supplies for the petroleum industry, points out Ole Anders Lindseth, the director general of the Ministry of Petroleum and Energy in Norway.
“So the oil and gas activities have rendered more than just revenue for the benefit of the future generations, but has also rendered employment, workplaces and highly skilled industries,” Mr. Lindseth says.
Maximizing the resource is also very important.
Because the government is highly invested, (oil profits are taxed at 78 per cent, and in 2011 tax revenues were $36-billion), it is as interested as oil companies, which want to maximize their profits, in extracting the maximum amount of hydrocarbons from the reservoirs. This has inspired technological advances such as parallel drilling, Mr. Lindseth says.
“The extraction rate in Norway is around 50 per cent, which is extremely high in the world average,” he adds.
Norway has also managed to largely avoid so-called Dutch disease (a decline in other exports due to a strong currency) for two reasons, Mr. Lindseth says. The GPFG wealth fund is largely invested outside Norway by legislation, and the annual maximum withdrawal is 4 per cent. Through these two measures, Norway has avoided hyper-inflation, and has been able to sustain its traditional industries.
In Norway, there’s no industry more traditional than fishing.
“As far back as the 12th century they were already exporting stock fish to places in Europe,” explains Rashid Sumaila, director of the Fisheries Economics Research Unit at the University of British Columbia Fisheries Centre.
Prof. Sumaila spent seven years studying economics in Norway and uses game theory to study fish stocks and ecosystems. Fish don’t heed international borders and his research shows how co-operative behaviour is economically beneficial.
“Ninety per cent of the fish stocks that Norway depends on are shared with other countries. It’s a country that has more co-operation and collaboration with other countries than any other country I know,” Prof. Sumaila says.
“That’s [partly] why they still have their cod and we’ve lost ours,” he adds, pointing out that not only are quotas and illegal fishing heavily monitored, policy in Norway is based on scientific evidence and consideration for the sustainability of the ecosystem as a whole.
Prof. Sumaila cites the recent changes to Canada’s Fisheries Act, as a counter-example: “To protect the habitat, you have to show a direct link between the habitat, the fish and the economy,” he says, adding, “That’s the kind of weakening that the Norwegians don’t do.”
Svein Jentoft is a professor in the faculty of Bioscience, Fisheries and Economics at the University of Tromso. He adds that Norway’s co-operative management style, particularly domestically, has been key to the continued success of the fisheries.
“The management system [for fish stock] is an outcome of the positive, constructive and trustful relationship between the industry on the one hand and the government on the other hand,” Prof. Jentoft says. “They have been able to agree on issues that you and many other countries haven’t been able to, largely because the government has listened to the fishermen.”
However, Prof. Jentoft isn’t on board with all of his government’s policies. He’s concerned about how the quota and licensing system is concentrating wealth and the impact that this will have on fishing communities.
He predicts that Norway’s wild stocks will remain healthy in the foreseeable future and that the aquaculture industry (fish farms), where Norwegians are world leaders, will continue to grow.
In 2009, Norway’s total fish and seafood export was $7.1-billion, $3.8-billion was in aquaculture. By 2011, Norwegian aquaculture exports grew to $4.9-billion. In Canada, total fish and seafood exports in 2011 were $3.6-billion, with approximately one-third from aquaculture.
Norway’s forests are another important natural resource, and its pulp-and-paper industry has many parallels to Canada’s. Both nations are heavy exporters of newsprint. With much less demand since the wide adoption of the Internet and competition from modern mills from emerging markets, both nations have suffered through down-sizing and mill closures over the past decade. Both have been looking for ways to adapt.
The Borregaard pulp and paper mill in Sarpsborg has become one of the world’s most advanced biorefineries. From wood, it creates four main products: specialty cellulose, lignosuphonates, vanillin and ethanol, along with 200 GWh a year of bioenergy.
“You have a diversified portfolio of products,” explains Karin Oyaas, research manager at the Paper and Fibre Research Institute in Trondheim. “The Borregaard mill uses all parts of the wood and they have a variety of products, so if one of the products is priced low for a few years, then maybe some of the other products are priced high.”
She feels this is a key change in direction for the industry in Norway. She doesn’t want to see the industry putting all of its eggs in one basket, as it did with newsprint.
Dr. Oyaas also thinks that rebranding the industry is key to its survival and success in Norway. The forestry industry doesn’t get the same kind of attention as the oil industry, nor does it have the high-tech image. But it is just as high-tech, and it has the bonus of being a renewable resource.
“You can make anything from the forest. You can make the same products that you can make from oil,” explains Dr. Oyaas.
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