Why The UK Lost Its Oil Wealth (And Why Norway Didn’t)
Great Britain and Norway: the two countries with the biggest reserves of oil in the North Sea. This key strategic resource has been a blessing for Norway, but its impact on the UK has been much more questionable. In this post, we’re going to look at how the discovery and exploitation of the same resource resulted in drastically different effects on these two European countries.
Oily game in the North Sea
Up until the Second World War, digging for oil on the coast of Western Europe was a futile endeavor. Pretty much every country had tried it, of course, but the numerous wells that had been dug produced less than a hundred barrels per day on average, which was completely insignificant compared to the vast oil fields of the Middle East.
The North Sea’s oil wasn’t discovered until the 1960s, and unsurprisingly before that, Norway wasn’t nearly as wealthy as it is today. Before the Second World War, the backbone of the Norwegian economy was fishing and shipping, which of course they were very good at, having had centuries of experience. The British, meanwhile, were busy doing their whole empire thing.
As the leading Naval power in the world, they relied heavily on oil. But one of the major problems with that was the fact that Britain didn’t have a lot of reserves itself. Instead, it had to rely on imports, which is why it supported the global expansion of Shell and BP, especially in the Middle East.
During the first half of the 20th century, no one thought the North Sea would be a worthwhile place to extract oil. It was a dangerous and difficult task to even try to search for it there, which is why the extent of its reserves was largely unknown. In 1958, the Norwegian government itself rejected the possibility of finding oil. But just one year later, a monumental discovery changed the outlook of the entire industry.
And what they found was…
In the northern part of the Netherlands, Shell had been looking for oil. While looking, Shell didn’t find any oil, but large quantities of natural gas. Nothing groundbreaking so far, but when they dug a few more wells in the same area, they discovered more gas at the same depth. In other words, they had stumbled upon a giant gas field.
As it turns out, the one they found was the largest one in Europe, but what made it truly significant was its implication for the North Sea.
You see, the geologies of both areas were very similar, so finding gas in the Netherlands meant that there might be oil under the North Sea. The oil companies scrambled and began their first explorations in 1962. Norway didn’t start giving out licenses until 1965, but they were in no rush. The stormy weather and still-developing technology meant that whatever oil could be found was going to be very difficult to extract.
The drilling rigs had to withstand 50-foot waves and winds of up to 70 miles per hour. So unsurprisingly, it took a few years and several deadly accidents before the oil could start flowing.
The first major oil discovery was made in 1969 on the Norwegian side. Then, in a mad streak of luck, the British discovered the largest field in the entire sea on their first try just a year later. In 1975, Queen Elizabeth herself would inaugurate the flow of oil from that field, and this gesture symbolized a new opportunity for both Great Britain and Norway to benefit from this new resource.
How Norway beat Britain
But the way both countries approached their newfound wealth was radically different. The Norwegians could afford the luxury of being patient. Their political situation was one of stability. Their leading Labour Party had been the largest one since 1927 and is the one responsible for the welfare system and they’re high taxes.
In other words, they had no pressure to immediately spend the oil profits to stimulate the economy in the hopes of ensuring their reelection.
On top of that, the government’s attitude towards private companies was aggressive. The only allowed a 50% ownership stake in any given well, with the rest being owned by the state itself. In 1972, the Norwegians went a step further, creating an oil company entirely owned by the state, which would then compete directly with foreign companies.
Norway was effectively double-dipping. Not only did it tax the oil industry excessively, but it also owned a big chunk of it. And what’s really smart is what the Norwegians did with all that money; they not only saved it but also started investing it.
In 1990, they created a special fund for exactly this purpose, whose growth rate ever since has been nothing short of exceptional. They put most of their money in stocks and bonds with a dash of real estate sprinkled on top, and the results speak for themselves. The Norwegian fund is the largest sovereign wealth fund in the world, and it even passed $1 trillion in market value in September 2017. And keep in mind that’s $1 trillion spread out over just 5 million people.
Did Tatcher make this worse?
So by all accounts, the Norwegians handled their oil boom perfectly, but the same cannot be said for the British. The surge of oil profits for Britain coincided with the rise of Margaret Thatcher. She came into power in 1979, and instead of setting up a fund to invest these new profits, she used the extra money to make radical reforms to the British economy.
She started a wave of mass privatization of companies that were otherwise profitable and made large cuts to income taxes in order to revitalize an otherwise stagnating economy. Her policies were successful in that regard and resulted in large economic growth.
These benefits were temporary. Unsurprisingly, when the revenues from oil started declining, Margaret Thatcher’s house of cards came crumbling down.
In essence, the UK and Norway took opposite approaches to their oil money. The British blew it on tax cuts while the Norwegians invested it and grew it to the point where this tiny nation of 5 million people is the largest shareholder in Europe. Norway is a perfect example of why investing is smart, and that’s a lesson we can all use.
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