Thursday, September 26, 2013

Even Norway Gets the Dutch Disease

We sometimes think of Norway as the country where fossil fuel riches are handled responsibly, not like the Alberta and Canadian governments that just piss it all away.  Yes, Norway has amassed an impressive sovereign wealth fund from its Statoil royalties but, beyond that, it has many of the same problems that confront Canada.  Like us, Norway is at serious risk from the Carbon Bubble.   The big difference is they've kept their money and so have resources to deal with it.   From OurWorld2.0:

According to the OECD, the Norwegian economy is projected to expand robustly in 2013 and 2014, mainly due to investments in the petroleum industry as “[n]on-oil exports will remain weak. Strong demand for labour keeps unemployment low and wage growth high”. 
Unfortunately for oil-exporting economies like Norway and Saudi Arabia, oil-importing nations such as Sweden, Finland, Denmark and Germany are systematically working to reduce their oil dependency and demand. Meanwhile oil imports by others like France, Italy and Spain are declining as a result of the recession. Even China is trying to control the pace at which the demand for oil imports grows .

Taking a longer-term view, since oil, gas and coal are non-renewable resources, they will eventually come to an end. The most readily accessible and cheap sources go first. Then more expensive and unconventional sources (like tar sands, shale oil and gas) are next in line. Costs, especially external ones, increase for marginal sources, while profit margins decrease. Oil becomes more expensive, while the alternatives become cheaper. The oil sector is therefore a sunset industry, while renewable energy is a sunrise industry.

...It is risky to stand on only one big economic leg while Norwegian companies that could step in are on their way out of the country to places where labour costs are lower. Average hourly salary rates in the main trading partner countries in the EU were US$30 in 2012, while the Norwegian hourly rate was US$61 according to Eurostat. Outsourcing of jobs is inevitable with differences like that, while immigrant labour enters. Hotel and restaurant workers in Norway are now Swedish, construction workers are from Poland and Latvia and taxi drivers are from Pakistan. When the oil adventure ends, most of these workers will leave.

This situation is asymptomatic Dutch disease. But since the economy is doing just fine, what can even the bravest politicians do in circumstances when the patient appears to be well? They have to be really forward-looking and that is not easy in the short-term world of politics. A more responsible policy would be to recognize the vulnerabilities of the contemporary Norwegian economy and reduce the risks, sooner rather than later.

...Since Norwegian politicians seem unable to set limits on the oil industry, oil companies do it themselves. Statoil is responsible for their bottom line, not for what is best for Norway. Avoiding two degrees warming now requires a tremendous global effort.

 ...Statoil might in theory accept that two-thirds of the world’s known oil reserves should be left underground in order to avoid future climate disasters. They also argue that Norwegian oil production is more environmentally friendly than that of other countries. The production technology is top-notch, with well under 10 kg of CO2 emissions per barrel of oil extracted. But if the environmental argument is essential, Saudi Arabia extracts oil at slightly over 6 kg CO2 per barrel. If Statoil wants to be perceived as more environmentally friendly, they should at least get away from unconventional oil sources such as tar sands in Canada, with up to 100 kg of extra fossil CO2 per barrel of oil extracted emitted into the atmosphere.

However, all that said and done, deep inside we know that extraction of oil is not the main issue. The fuel consumption is. Regardless of origin, every barrel of oil burned means 400 extra kilograms of fossil CO2 is added to the atmosphere. Currently, the world burns nearly 90 million barrels of oil every day. 

Accumulation of CO2 in the atmosphere has already reached 400 ppm as of May 2013. If you include the other greenhouse gases we are up to 475 ppm. If we add the extra five percent increase of water vapor in the air that man-made global warming so far has caused, we are fast approaching 500 ppm. Without action, a warming of over three degrees could already be embedded in the system.

In this context, it is clearly irresponsible to continue to let the Norwegian oil pension fund invest in carbon-intensive activities. Norwegians instead must use the fund as a tool for a responsible climate policy, and invest in green technology.

Over the next decade we can expect major shifts as some of the Organisation for Economic Co-operation and Development countries probably will halve their oil imports, renewable energies become cheaper than fossil fuels, and new technologies are introduced like smart grids, improved battery storage, and electric vehicles with longer range. Norway, with its oil dependent economy, risks being left behind. At the same time, we will begin to see clearer signs of climate change and associated social and economic impacts including growing refugee flows.

There are some changes that Norway could make to ensure it is better placed to respond to these challenges and to start reducing the 250,000 vulnerable oil-based jobs in the economy. First, diversify the economy — renewable energy, eco-friendly processing, fisheries, tourism, nanotechnology, robotics, green architecture, self-sufficiency, and information and communication technologies are some of the natural priority areas for Norway. Second, use today’s wealth to make this new economy a reality — stop state guarantees, tax cuts, special arrangements and other incentives for increased oil exploration and production, and redirect those funds to other industrial sectors. Third, elected politicians need to step forward and govern the Norwegian economy and take the reins away from Statoil.

The Norwegian economy and Norwegian society should have more to stand on than a single crumbling petroleum leg.


Owen Gray said...

Harold Innis warned of the "resource trap" long ago, Mound. Unfortunately, we've forgotten him and our own history.

The Mound of Sound said...

True enough, Owen. It's disheartening to hear the Tar Sanders go on as though this country would be nothing without the bounty of bitumen.

The curse of an extractive mineral economy is that it almost thwarts critical thinking.

Recall when Ignatieff referred to the Athabasca tar sands as the "beating heart of the Canadian economy for the 21st century"?