In 1990 the forward thinking Norwegian government established the Government Pension Fund of Norway (also known as the Oil Fund) to invest the surplus revenues of the Norwegian petroleum sector. The purpose of the fund is to invest parts of the large surplus generated by the Norwegian petroleum sector, mainly from taxes of petroleum companies but also payment for licenses to explore for oil as well as the State’s Direct Financial Interest and dividends from the partly state-owned Equinor. Current revenue from the petroleum sector is estimated to be at its peak and is envisaged to decline in the future decades. The Oil Fund was established to counter the effects of the forthcoming decline in income, as the oil reserves eventually run out completely, and to smooth out the disruptive effects of highly fluctuating oil prices.
So back in the 1980’s, the Norwegian’s could foresee a time well into the future where the revenue generated from petroleum resources would decline significantly. To overcome this problem, they decided to establish an investment fund that they could contribute to, to grow and later harvest the profits from to supplement declining oil revenues.
The first investment into the fund occurred in 1996 when the government injected an initial amount of $18 Billion Kroner (approx.. USD$2.2 Billion) in 1996. Since the initial investment, the fund has grown to be valued at over 450 times the initial investment amount and as at 2017 was worth $8,400-Billion-Kroner, or roughly USD$1 Trillion (This sum of money is so vast I had to double check what $1 trillion looks like in numbers. It’s actually 1,000-x-$1 Billion, or, 1-with-12-zero’s $1,000,000,000,000)
In 1969, oil was discovered in the Ekofisk offshore field in the North Sea, marking the beginning of Norway’s oil wealth. It soon became apparent that the management of oil assets and revenues would be decisive for the Norwegian economy.
Revenues from natural resources such as oil, gas and minerals are known to be finite and volatile. When generated revenues are large enough, there are three main risks for the host country, the first two concerning governance, the third economic stability:
The fund’s investment strategies and growth over time
The Oil fund invests in a range of diversified assets, however, the majority of the fund’s investments are held in growth assets with approximately 65% of the assets held in global equities (various diversified global companies around the world). In 2017 alone, the fund’s earnings (eg. The money that was made by the investment returns) equated to USD $130 Billion. Because the fund has a long-term investment objective, it can handle the sometimes-significant volatility that comes with holding such a large percentage of growth assets.
To avoid being subject to “Dutch disease” and future governments being able to pilfer the fund to overspend on the economy for their own political gain, the ministry of finance implemented a fiscal law in 2001 capping the amount that can be withdrawn in any one year to 4% of the value of the fund. Given the investment strategies of the fund could be expected to average 6% – 7% pa. over time, a 4% maximum withdrawal rate in any one year ensures that the fund will continue to grow over time.
Oil Fund facts:
2017 fund value in USD: $1 Trillion
Norway’s population: 5.23 million
Fund value for every 1 Norwegian: USD$191,000
2017 fund earnings in USD: $130 Billion
2017 fund earnings for every 1 Norwegian: USD$25,000
Historical value’s of the fund in USD:
2017: $1 Trillion (1,000 Billion)
2015: $900 Billion
2013: $600 Billion
2011: $400 Billion
2009: $317 Billion
2007: $240 Billion
2005: $168 Billion
2003: $101 Billion
2001: $74 Billion
Lessons for aspiring retirees
Despite the scale of Norway’s Oil fund being vastly different from that of the average 50-something-couple’s retirement savings, the investment policies of the fund are strikingly similar to how aspiring retirees should behave. The similarities that I can see are:
Why isn’t Australia doing the same thing as the Norwegian’s?
On one hand Australia is very similar to Norway. We both have small populations by world standards; both have valuable levels of natural resources; we both rank high in the world Livability/Human Development index (Norway is ranked #1 and Australia #2). Yet Norway is investing it’s Oil taxes for the future whereas both major political parties in Australia have shown in the recent past that natural resources taxes are fritted away.
This is just my theory, however, I believe that the Norwegian’s focus on the future has to do in part with their history. In particular, the “Little Ice Age” between AD1150 – AD1850 occurred where the earth’s climate was significantly cooler than the preceding period. The little ice age affected Scandinavia considerably: Plague was prevalent; crops struggled to grow and the population of Scandinavia declined significantly. These stories are no doubt still passed down in Norwegian society today. I cannot help but think that it is this history that has led Norwegian government’s decision to invest heavily in their fund whilst times are good, so that they can fall back on it in the future when times aren’t as good.
Sources: Wikipedia; Norges Bank Government Pension Fund Annual report 2017; United Nations Human Development Index.
Written by Michael Hogue.
Dallas Davison, Michael Hogue and Ali Hogue.