Buying Votes with Oil Money

People usually don't care much about Norway, on account of its relatively small size, population-wise (4.5 million inhabitants). However, as we have noted on previous occasions, its economy is beset by the Scandinavian bubble disease, with household debt growing to the sky and real estate prices exploding into the blue yonder. The central bank, faced with what it deems an overvalued currency, has kept interest rates at rock-bottom, continuing to fuel these twin bubbles. Nothing can possibly go wrong of course.

However, Norway is also quite unique due to being blessed with large oil wealth. Considering the tiny population, this oil wealth has allowed politicians to both save funds for a rainy day (said rainy day will arrive once the oil runs out, or so the theory goes), as well as financing a vast socialistic welfare state. Note that just because the central authority has lots of money to throw around, socialism cannot really be improved upon. It would still be far better for the country if the services provided by the government were provided by the market. And yet, Norway's government wants to throw more money around and enlarge the welfare state even further, in the hope of getting re-elected. As this is what it is going to use some of the accumulated wealth from oil sales for, we can state that saving for the dreaded 'rainy day' has for now given way to the exigencies of elections.


Throwing even more funds on the bubble bonfire that is Norway is not really apt to improve the country's economic risk profile. According to Bloomberg:


“Prime Minister Jens Stoltenberg pledged to build Norway’s welfare system, financed by the nation’s $750 billion oil fund, as he trails in the polls behind an opposition that’s promised tax cuts.

Stoltenberg, who is seeking an unprecedented third four-year term in September elections, said western Europe’s biggest oil producer needs a more developed system of public benefits as his Labor-led coalition raises spending by 19 percent in 2013.

“The main mission of the campaign is to tell voters why ours is the best government to lead Norway in the future, both when it comes to economic challenges and when it comes to further developing the Norwegian welfare state,” Stoltenberg said yesterday in an interview in Oslo. “It’s absolutely possible to win three elections in a row in Norway and that’s what I’m going to campaign for.”

Norway, where survey unemployment was 3.5 percent in April and manufacturing labor costs are almost 70 percent above the European Union average, is grappling with signs of overheating as its oil wealth drives up asset prices. Stoltenberg and his main rival, Conservative Party leader Erna Solberg, have both sought to entice voters with campaign promises that risk stoking demand further in the $480 billion economy.”


(emphasis added)

Let's ignore the Keynesian verbiage and focus on the decisive points: the government has increased spending by 19% this year alone. Should Norway ever be forced to compete with anyone outside of the oil business, it would probably be in for a Greece-like shock treatment given its labor costs.

It has a huge asset bubble, a central bank that exhibits a Greenspan-like abdication of responsibility for the bubbles it fosters, and a government that thinks its most important task is to greatly expand the welfare state – which is already of the cradle-to-the-grave variety. It all sounds a bit like that other golden cage, Denmark (although the latter comes minus the oil).


The Biggest Housing Bubble in the Region

Norway's bubble meanwhile is really in a class of its own. It has far outclassed the likewise impressive housing booms of its less oil-lubricated neighbors. Denmark is already struggling with the air coming out of its bubble, in spite of interest rates remaining near zero. There is a slight wobble visible in Sweden as well. Norway? Up and away!



Norway BubbleHousing bubbles in socialist paradises up North. Norway's is by far the most impressive – via



Even more stunning is however the following chart comparing real house prices in Norway with those in the US:



Real House prices comparedNorway's real house prices compared to the US – the US housing mania looks like a fairly harmless blip by comparison – via



We have taken these charts from an article by Mark Thornton at, who discussed the Oslo bubble earlier this year. Thornton notes that as of the time of writing, Norway's economic data looked so good, they almost looked too good to be true. This continues to be the case (read: the bubble is still expanding).

However, Thornton also points out where the weaknesses are likely to be found:


“We cannot know for certain that Norway is experiencing a bubble. However the reasons we suspect a bubble starts with their economy. Norway’s rosy economy is not the result of good policy, but of oil revenues that subsidize their socialist government. Norway ranks 40th on the Freedom Index, below Belgium (38) and Armenia (39), and only above countries like El Salvador (41) and Peru (42). A steep drop in oil prices would be a severe blow to their economy. However, as oil revenues are continuing to pour into the government budget and sovereign wealth fund, it makes the Norwegian economy look like a good bet.


Instead of allowing the krone to increase in value with this increase in demand, the Norwegian central bank, the Norges Bank, has instead countered with an increase of supply. They have intentionally set interest rates artificial low. The overnight deposit rate has been set at 1.5 percent since last December. They are trying to prevent the krone from appreciating in value, but their efforts have not been completely successful. Preventing this appreciation of the krone is intended to protect exporters, including their national oil company. However, it also helps pump up the housing bubble.

Monetary inflation, as measured by Norway's M2 measure of the money supply, has lately been running at 8%. During the economic crisis, circa 2007, it ran as high as 20%. From 2008 to the present monetary inflation has averaged about 7.5%.”


(emphasis added)

This is like Switzerland on steroids (Switzerland's central bank also pursues an extremely inflationary policy in order to keep the Swiss Franc down). Of course economists everywhere regard the actions of both the Norges Bank and the SNB as perfectly fine. After all, 'what can they do'? No-one seems to think an appreciating currency a good thing, which is utterly bizarre.

Norway not only swims in a sea of oil money – which is fine in principle, but as Thronton notes, also dangerous, as oil prices presumably won't remain high forever (and the government keeps ratcheting up its spending as though high oil prices were set in stone) – it also swims in a sea of krone currency its central bank has created ex nihilo.

Just as Dubai one day found out that trees don't grow to the sky, even if one is surrounded by oil wealth, Norway could come to learn a bitter lesson as well once its bubble bursts.




Norway's socialist prime minister Jens Stoltenberg: provider of welfare-statism financed by oil revenues (a.k.a. 'the pusher').

(Photo credit: Ramin Talie/Bloomberg)




Stoltenberg photographed from behind. Sorry, we couldn't resist.

(Photo credit: Nicolas Winding Refn)




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6 Responses to “Norway is a Junkie, and Oil is its Heroin”

  • Marit:

    Thank you. I really appreciate that you are writing about the situation in Norway. Most people up here are so duped by the manipulative politicians and the main stream media that they have absoulutely no idea what the near future has in store for them.

  • Marit:

    Interesting article, but it seems that the writer, Tenebrarum, is perhaps not very familiar with the political game in Norway. Most of the oil revenue has been placed in the so called Oil Fund aka “Norwegian Government Pension Fund Global”, which today amounts to NOK 4,182 billion. It is a joke to think that this fund will benefit norwegian pensioners. I would be very surprised if the fund would be able to retain more than 50 % of its value in the coming years, ie in the coming stock and bond collaps. Most of it is being invested aboad, almost nothing in Norway even if we need investing in infrastructure etc. I would like to know how much the vampire squid has profited from the fund.

    Norway does have a housing bubble, but we do not know when it will collapse.
    What we do know is that unemployment among Norwegians is rising, the industrial base ex oil is being systmatically demolished and exported aboad, and the unemployment figures are being hidden within the welfare system. But the wefare system is being built down, the prime minister and his minions are aware of and promoting this but is hiding this fact from the voters. This is in accordance with EU policy, and the two political blocks are in perfect agreement on this issue.

    Norwegian workers are increasingly being replaced with low wage workers from EU countries which are also getting access to our welfare system which because of EU rules are giving foreign workers the possibility to export allowances to their families in their home countries. This is a big drain on Norwegian tax payers, and of course results in a decreasing acceptance of the welfare system.

    How is this possible?
    Norway is not a member of the EU because the Norwegian people has voted no in two referendums, in 1972 and 1994. But the political and financial class has always beeen in favour of EU membership, and an agreement with EU was established in 1992, the EEA agreement. The parliament refused to let the Norwegian people have a referendum on this agreement. Switzerland also negotiated this agreement, but the Swiss people had a referendum and voted no. This EEA agreement is in reality an instrument for implementing EU law in Norway, and the parliament agrees to everything coming from EU. This represents a violation of our constitution, but the political class couldn’t care less. Democracy in Norway is as good as non exsistent. It doesn’t really matter who wins the next election, the politics will remain the same, all important decisions will be made in Brüssels and the parliament will vote in favour of it. Presently the polls show that more than 70 % of the people is against EU membership, in the governement and the parliament it is the other way around.

    Although Norway is one of the richest nations in Europe measured by GDP per capita, it is the only European country without a gold reserve. The last remnant of our gold reserve was sold in 2004, which was probably right because it was kept in the US, in Fort Knox. Governements neglecting to assure that the country has got a sound gold reserve in todays chaotic global financial situation clearly has not the interest of it’s own nation and people in mind.

    • Thanks a lot for the additional color on Norway. I had to confine my article to the things I do know, and can observe from afar, so by necessity it is incomplete. But my suspicion that not everything is fine in Norway has been confirmed by what you write (I called it a ‘golden cage’ similar to Denmark, and now I find out it doesn’t even have any gold…)

  • Worldend, is there any international demand for Norwegian currency? The US at least has the outlet of money flows to places where it is needed to cover liabilities.

    I recall my mother and niece going to Norway a few years ago. The family they visited, the woman of the house had gallbladder problems. They wouldn’t operate until it was about to kill her. All this money and free, but non-existent health care.

    With home prices at levels on the charts, there must be a restriction on new construction. Norway looks to be a pretty sizable country on the map, so where is the new supply? Has the government and the central bank built a box of debt for the people?

  • worldend666:

    Having said that, some of the banks in Norway have 50% cash to back their deposits.

    I can see how the money seeps out of the country. Whilst wages have to be enormous to compensate for the high local cost of living and the enormous salary taxes, it’s simple matter to work there for 6 months completely tax free and take off with 100k in your pocket.

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