How Norway Get So Rich

Norway is one of the wealthiest and most advanced economies in the world.

By Arsalan HaroonPublished 2 years ago • 6 min read

Edited by the author

In 2021, Norway’s GDP per capita was 89k dollars, one of the highest in the world.

Norwegian citizens enjoy free education. It continues to rank highest in the happiness index along with Sweden and Denmark.

Over the four or five decades, Norway’s economy had massively transformed and changed itself from fishing to the oil industry.

In 2022, Norway’s economy ranked 14th in the economic freedom index.

In Norway, The life expectancy for men is 81 and for women is 84. which ranks 17th in the world. This longevity is because of improved economic growth and a quality healthcare system.

So what factors led to Norway’s enormous economic growth, which improved the lives of every Norwegian?

Oil and Gas Industry

Norway is the 12th largest oil-producing nation in the world. It is the fifth largest oil exporter and the third largest gas exporter.

On 25 Feb 1958, a letter from the geological survey of Norway to the Norwegian ministry of foreign affairs stated that the chances of finding Oil off the Norwegian coastline were negligible.

When natural gas reserves were found in the Netherlands, Most people speculated that oil reserves can be located in the north sea.

In 1963, Norway declared any oil found off its coastline belonged to them. In April 1965, Norway started selling exploration drilling licenses.

Phillips petroleum purchased an exploration license and began drilling. Try after try they were finding nothing, So Philips gave it the last try which will go deeper, and in 1969 the first found oil was extracted from the north sea and was in massive quantity.

Norway was quickly producing more oil per resident than any other country. The oil sector was becoming a booming industry in Norway. thousands of new jobs were created. With the blessing of oil, Norway was transforming itself from an economy based on fishing to an oil-based economy that would bring billions of dollars into the economy.

But the Norwegian government wanted every Norwegian citizen to reap the profit from the oil discovery, not a private company.

After all, it was in Norway land where oil and gas were discovered, So the Norwegian must also get the rewards.

On 14 June 1972, the Norwegian parliament voted to establish a state-owned oil company Statoil and the Norwegian petroleum directorate as the industry regulator.

It gave Norway power and benefits over the profit that it would earn from its oil. It created a new source for government spending.

But Norway was reluctant to spend all the money it was earning from oil revenues because it knew oil won’t last forever. Norway wanted to find a way to secure its wealth when the oil ran out.

Sovereign Wealth Fund

In the 1980s, when oil prices plummeted, and oil-rich economies went into recession.

Norway learned a valuable lesson at that time. When an economy is at the mercy of a single commodity price, It can make the economy highly unstable as the price of a commodity moves up or down. The solution was to diversify and stabilize the economy.

In 1995, the government established a sovereign wealth fund, also known as the government pension fund of Norway, funded with oil revenues.

Most oil-rich countries remain poor because they started spending more today than saving for tomorrow.

Norway knows that oil will not be there forever. It is a limited resource. They have to stabilize their economy and eliminate oil dependence if they want to remain wealthier in the long term.

This state-owned investment fund invests in the stock market and financial markets around the world.

This state-owned investment fund cannot invest in Norway because its purpose is to diversify the Norwegian economy by investing in international businesses. So if an economic recession occurs in Norway, Its investment return is protected from it.

Norway is a perfect example of a person who wins a lottery, and instead of spending all the money today, he saves and puts it in the financial market to grow the money slowly and steadily.

This method may be dull for most people, but it is the most effective way to build wealth and remain wealthier in the long term.

Today, Norway’s sovereign wealth fund is the largest in the world, with 1.36 trillion dollars in assets.

Norwegian law restricts the government from withdrawing funds funded by oil revenue because that money is for the people of Norway.

The government can only withdraw a 3% return earned by a fund during a year.

In December 2021, the fund was worth about 250k dollars per Norwegian citizen.

Although, Norway citizens can’t take that money because it is invested in the financial market for the long term to survive without oil.

Norway’s sovereign wealth fund owns 1.5 of all the world’s listed companies. The fund invested in over 9,123 companies in 73 countries.

Conclusion

One of the reasons why most oil-rich countries remain poor is that they tend to spend more today and save less for tomorrow.

They made their economy heavily dependent on oil, and any downturn in the oil prices takes their economy into crisis.

When countries discover large oil reserves, They tend to reduce taxes on citizens and give more money to the people than before.

When Government spending is financed by oil revenue, It can go down when the oil price goes down, Which can reduce the control of their economy because they can’t control the oil prices, so when oil prices go down, their public spending goes down with it. Which also slows down the economy.

Oil companies would employ a large part of the oil-rich country’s labor force, and when the price of oil goes down, oil companies will cut back on expenses and lay off workers, which can cause economic crises in the oil-rich country.

Norway, despite being blessed with huge oil and gas reserves. It continues to finance its government spending by imposing high taxes on Norwegian citizens. Also, people are willing to pay high taxes for certain benefits like the free quality education system, which made Norway one of the most educated countries in the world.

Benefits of healthcare services could get free if the amount is up to a certain level. In 2021, the amount was 264 USD, and any medical treatment above that amount is given for free and financed by the Norwegian government.

Photo by Hush Naidoo Jade Photography on Unsplash

Norway didnt make the mistake of using oil wealth for today and not saving for tomorrow.

The Norwegian government saves their oil revenue and invests in their state’s investment fund, which would invest in international companies and diversify their wealth from oil.

So when the oil reserve is no longer, they could depend on their trillion-dollar fund, the largest sovereign wealth fund in the world, This is why Norway gets so rich, and many oil-rich economies remain poor.