“So for the Norwegian people, the oil revenue is not revenue at all, it’s just wealth being moved into a more diversified portfolio for the future.”
Yngve Slyngstad, CEO of Norges Bank Investment Management (NBIM)
Reading this quote immediately got me thinking of almost all oil & gas-exporting countries, in particular Malaysia. Our revenues derived from these non-renewable resources are treated as income in our national budget. We take it in as part of our federal revenue, and a substantial part of it goes into financing our annual operating expenditure (essentially the year-to-year costs of running the country).
However, implicit in this action is the belief that this revenue belongs to us. By ‘us’, I mean the current generation in Malaysia at the time when the resources are being extracted. While this will certainly split opinions, I believe this money is wealth belonging to our country. Our country in my view includes both our generation as well as future ones. I thus believe the Norwegian model has many merits.
In Norway, the Government Pension Fund Global was set up to ‘support long-term management of Norway’s petroleum revenue’. Firstly, the capital is invested overseas. This prevents an overheating of the Norwegian economy arising from these large resource flows, which maintains competitiveness of the Norwegian economy (something other resource-rich nations have had issues with).*
More importantly, there is a rule that the “non-oil budget deficit shall correspond to the real return on the fund, estimated at 4 percent”. In simple words, this means that on average, the government is only allowed to spend the return on the investment of the oil revenue, rather than spend the oil revenue itself. This ensures the oil revenue obtained now will be there to generate returns for future generations to enjoy. It is also said the fund can also cushion short-term economic fluctuations as well as meet the challenges of the country’s ageing population and future drop in petroleum revenue.
An analogy to this is inheriting a huge house from your parents. The Norwegian model means you keep the house, spend only the rental income, and pass it on to your children. The conventional attitude is to sell the house (oil) and use the money (oil revenue) now.
Whether or not you agree with the Norwegian way, it is certainly food for thought.** I’ve personally taken for granted the fact that our oil and gas revenue was for us to spend until reading the above quote. I hope this will spark your thoughts too.
Please see the first comment for footnotes