This article was first published in the Norwegian On-Line newspaper Dagsavisen-Nyemeninger 26 Feb 2014.
The consequences of having a declining Norwegian oil sector
In this introductory paper, I wish to share some thoughts, to open the discussion and to see what alternatives are available to respond to such title as What Future Norway.
Actually I should start this paper by mentioning the fact that for Europe this year marks 100 years since the First World War. So much has taken place since then, but maybe the central issue has not been solved yet: the economic issue. The Great Depression in the industrialized World of the 1930’s pushed Hitler up the political stairs, while today the economic recession caused by the so-called “Financial Crisis” in the United States have strengthen (or created) theGolden Dawn in Greece, the Jobbik in Hungary and the National Front in France (in the UK the National Front rose strongly since the 1970’s).
The reasons behind addressing such issue as What Future Norway relates to the recent developments in the World Oil Market and its expected repercussions on Norway.
Norwegian companies with Advanced-Technical know-how have already migrated to China (in pursuit of profit maximization); endless examples are available, take ABB most advanced manufacturing facilities ABB Robotics at Bryne. This development implies that building hopes on encouraging manufacturing industry as a possible substitute to a declining oil sector are absent. Many other companies have exported their manufacturing premises to Asia, while keeping a nominal number of employees, at their main HQ in Europe.
I guess we cannot count the number of American and European manufacturing companies that closed their doors and re-opened in China. How many millions of unemployed workers in Europe and the USA do we have today because of that migration?
In the USA or Europe there is always the persistent question: was the Banking System behind the financial crisis, or more correctly was the mass unemployed caused by the migration phenomenon behind the Financial Crisis (the real side of the economy verses the nominal side)?
What are the consequences, these days, of having mass unemployment? What happens when people become unable to pay back their loans to the banks? What happens to the banking system when the banks are unable to reclaim their debts?
It is a well-known fact that manufacturing industry, regardless of how advance technology is, requires large numbers of workers. While the Distribution “Industry”(assuming we can call it an industry) compared to it, requires much less workers. The difference is the amount of unemployment created.
This is the picture today. The Manufacturing Industry is located in China, while the Distribution Industry is located in both Europe and the USA. Put it in different words, Europe and the USA are today the Warehouse of what is manufactured in China.
This is the new International division of labour. This new division of labour creates structural unemployment. In addition, this structural unemployment does not possess the traditional options, for all other manufacturing industries have also migrated to Asia and the rest will follow.
We can take Apple as a simple example. All the IPhones, IPads and the Laptops are made in China, while the main distribution chains are located in the USA and Europe. Chinese labour is engaged in the manufacturing process while the American labour is confined to the marketing and selling chain. The design of the products of Apple is still done in the USA, but the Chinese have already started learning how to design new products. Soon they will be entering the American and European market with their own high quality products at less than half the American or European prices. What then are the consequences? There are significant direct and indirect repercussions on the National economy of such development (which are outside the scope of this paper).
In the North Sea we have witnessed many cases when Oil Companies, in their pursuit for profit-maximization, place orders with low-cost Asian contractors. Low cost when examined from the perspective of the companies, but not from the National perspective. National Norwegian calculations will indicate that placing the order with Norwegian contractors is actually cheaper than Asian contractors (when you take into account the huge taxes paid by Norwegian contractors to the State) add to that the secondary activities created and the income generated (through the usual Multiplier Effect). There are many adverse consequences generated when one technician from the Oil Sector is out of his job. If the number increases then this will create a significant deficit in the National Budget with serious political consequences.
FrP’s agenda of reducing the size of the Public Sector is an additional serious challenge. You cannot fire people from the normal jobs and expect them to “change” their qualifications, over night, and become doctors or engineers. In most parts of Norway you cannot actually find a job opportunity. Most of these opportunities are state creation. The market is very limited and under such market circumstances “the invisible hand” will not function. You cannot initiate a commercial viable enterprise unless there is enough demand. And that condition is simply absent.
With the expansion of the EU towards the East, the movement of labour from East Europe is becoming an increasing challenge to the local available jobs. Manual jobs like carpenter /plumber /electricians / builders/Hair Dressers in general are taken up by East-European low-priced workers. Many Norwegian businesses could not simply compete when faced with competitors using such cheap foreign labour and had to close down, take as a good example the Hairdressing Saloons. Such developments do not only have present day consequences but rather long term. In addition to the manual jobs group, Norwegian Airlines have introduced a new variable into the equation. They are proposing to employ cheap foreign labour onboard their airlines. This implies that more potential jobs are closed before the eyes of the local worker. If other commercial enterprises follow after then the employment situation for the local working force will look very depressing.
The Norwegian traditional sectors, such as Fishing, when examined from the point of view of employment-generation capability is very limited, and provides no alternative for the employment option before the young generation.
The successive Norwegian governments never had a plan for creating a viable self-generating economy, and never envisaged such a need. On the contrary, they continued their policy of investment abroad (Oil Fund) – that is the opposite of what is needed, one might argue.
In addition, the Norwegian Government sold part of the ownership of the main Norwegian company – Statoil. Oil producing Countries in the Middle East have done the opposite: they have nationalized the foreign oil companies and created national companies that follow the country’s national interest. As a simple example, take ARAMCO. After nationalization it became known as Saudi ARAMCO. This national oil company follows government policies and not the policies dictated by the oil market.
Inward-looking policies. Most of the Norwegian oil-and-gas-related companies are well-established within the confines of the North Sea. Although the International Oil industry has always witnessed strong expansion, yet most of the Norwegian companies prefer staying “at home”. Maybe one of the mail reasons for this attitude is based on the high standards of living in Scandinavia. But this “high-standard- model”is not limited to the Oil Sector. All Norway enjoys the same standard of living.
Therefore, what policies can be taken to ensure the stability of the Norwegian economy under such volatile conditions? Buying back all the shares of Statoil from other foreign oil companies would seem the most logical step. It will ensure that the policies taken up by Statoil reflect the National interest, and not the interest of the few shareholders. Maybe, the present Norwegian Government is not interested in matters relating to saving jobs more than their keen interest in improving the welfare of the rich through abolishing specific taxes. But, if what has been announced that Statoil will decrease its maintenance and modifications budget by 30% this year and 40% next year, then nobody should be surprised if the direct and indirect consequences of such a policy will lead to an increase in the rate of unemployment from its 3,5% present national level and up to 30% (if not more). With such a development, one might seek to envisage the consequences on the Housing market, or the banking system, just to mention a few. Having an unemployment rate of more than 30% will lead to political consequences beyond our present imagination.
Note / Sep 2016
Since the publication of this article back in Feb 2014 and history has shown that all its predictions are correct. Unemployment is keeping rising, and China is becoming the major industrial country exporting its own products internationally.