The Norwegian Petroleum Industry's Impact on the Economy and the Wage Determination

The level of production of petroleum and the economic activities related to this industry are currently at a high level although production of oil and gas has declined for nearly a decade. It is now expected that production will remain at the current level for some years while the demand effects from use of inputs in petroleum may even increase further. By 2015 we expect that these demand impulses to fall while production remains quite stable for another five years. From then on both demand and production will be in decline for a long time. The ageing of the population and the decline in impulses from the petroleum sector in Norway; will most certainly make their mark on economic developments in Norway in the longer run.

We use the macro-econometric model MODAG to make projections for the Norwegian economy till 2040. From 2015 to 2040 factor demand from the petroleum sector will be halved. This implies annual negative demand impulses equals to 0.4 percentage points of GDP Mainland. Fiscal policies are assumed to be in line with recent practise. In the next few years taxes are reduced somewhat while standards and coverage of social welfare services are moderately increasing during the whole forecasting period. These assumptions imply fiscal stimuli of ¼ percentage points of GDP Mainland the coming 15 years and thereafter fiscal policies are neutral. Growth in pensions in real terms will impose an increasing burden on the budget and population ageing will increase the need for social care.

We focus on the long run features in the reference scenario; it shows a balanced economic development for Norway without large cyclical variations. The demographic development leads to lower growth in GDP per capita. From 2012 to 2040 non-oil GDP grows on average by 1.2 percent annually, 0.5 percentage points less than during the previous 15 years. Total consumption per capita is found to grow 0.5 percentage points faster than GDP. This is due to the increase in financial revenues based on the returns from the government pension fund.

A sudden and large drop in demand from the petroleum sector would involve larger need for adjustments in the economy than what is the case according to our reference scenario. A decline in the global economy in 2015 that after a while leads to a permanent reduction in the oil price from 94 to 63 USD per barrel in 2015-prices will imply a number of negative impulses to the Norwegian economy. The consequences will be a significant drop in economic activity in Norway. While a decline in global economic activity affects the Norwegian economy almost immediately, it will take some time before lower activity in the petroleum sector becomes important. Following both lower revenues from petroleum and non-oil income, fiscal policies will be adjusted. We find that a budget policy that becomes stricter from 2017 and onwards by reducing spending so that standards and coverage of social welfare expenditures remain constant, growth in government investment in infrastructure is reduced markedly, and taxes are increased somewhat, is sufficient for a long time to avoid breaking the fiscal policy rule. However, towards 2040 taxes will have to increase somewhat more in order to meet the 4-percent rule embedded in the fiscal policy rule.

Even without countercyclical fiscal policies, the increase in the unemployment rate is only 1.4 percentage points compared to the reference scenario. In the short and medium term the manufacturing industry is much affected by the drop in oil prices and after four years value added is almost 10 percent lower. Lower profitability and reduced pressure in the labour markets will reduce wages. Together with a depreciation the cost competitiveness improves. This will lead to higher output in manufacturing towards the end of our alternative scenario where manufacturing output is 9 percent higher than in the reference scenario in spite of a drop in global trade of 7 percent.

If the drop in oil prices is caused by a positive supply shock, the economic activity in nonoil producing countries is stimulated. This will lead to higher global trade and demand for Norwegian exports and thereby counteract the initial negative impulses that come from a drop in oil prices. The consequences for the Norwegian economy will then be even smaller than what we described earlier.