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Its Official: This Oil Giant Has Avoided Dutch Disease

February 22, 2018/ 11:10

Oslo. An abundance of oil and gas can be a curse if not managed properly. In academic circles it’s called Dutch Disease, a term that was coined after the Netherlands suffered a decline in manufacturing following the discovery of major petroleum riches.

Other countries have fared worse. In Venezuela and Angola, the discovery of black gold has depressed productivity and income.
Catching the malady has long been a concern in Norway, western Europe’s biggest oil and gas producer. But after almost five decades of production and no major symptoms in sight, researchers at the central bank are ready to give the country of 5.3 million people the all clear.
In fact, the discovery of oil has actually boosted productivity across the Nordic economy, according to a new 39-page Norges Bank working paper by economists Hilde Bjornland, Leif Anders Thorsrud and Ragnar Torvik.

The “value-added per worker in the economy increased with the oil boom, as there’s learning by doing in the oil service industries that spills over to the other industries,” the economists said.

According to the paper, the same can be seen in today’s North American shale boom, which has rapidly turned the U.S. into a net exporter of oil and gas. “Contrary to predictions based on the influential theory of Dutch Disease, there has been no crowding out of the manufacturing sector so far” in the U.S., the economists write.

The theory goes that when an economy creates a new and profitable sector, economic resources are shifted toward that area. This is known as the resource effect. The new revenue flowing in from the sector then pushes up prices and the real exchange rate. This is known as the spending effect.

The researchers say that Dutch Disease and so-called Learning by Doing theory have been paying too much attention to the spending effect. Incorporating the productivity dynamics gained from the windfall and the resource movement effect “dramatically” alters the conclusions of early Dutch Disease theory, the researchers say.

While Norway needed outside help to discover oil in the late 1960s, it has since transformed large parts of its industry to become a global supplier of oil and gas technology, replacing less productive sectors. As the study puts it: “shipyards workers who used to be welders are today experienced in complex deep sea technology.”

Norway has also helped shield the economy from the spending effect by putting large parts of its oil cash into a wealth fund, which is now worth $1 trillion. The fund serves as a piggy bank for future generations and as a cushion in difficult times. The government dipped into the fund for the first time in 2016 after the country was hit by an oil price shock.

Prime Minister Erna Solberg has made it one of her main goals to reduce Norway’s reliance on oil as renewable energy grows in popularity. A future central bank study could look at whether Norway will have successfully exited the oil age with its living standards intact.


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