How big decline in oil investment, we must prepare ourselves?
No one has reliable answers.
Consolation for oil country Norway has been that we have something that few other oil-producing countries: We have a buffer – Oil Fund. Fluctuations in oil and oil does not turn right onto the state budget.
But everything is not as before, nor for the state and the Oil Fund.
From oil in the ground into money in the bank
Oil Revenues ports in the Oil Fund, which invests money abroad. We confine ourselves to spend 3-4 percent of each year is standing inside the fund, to cover part of the government’s ongoing expenses.
Since the Oil Fund has increased so dramatically in recent years, it has given room for rapidly increasing transfers to the state budget.
It is this that in the process of change.
Many arrows pointing down
Oil and gas production from Norwegian Continental has fallen by a fifth since the peak in 2004. Now also oil prices fell sharply.
Supply of Oil Fund of new oil money from oil taxes and state stakes in oil fields will now decline faster than previously thought.
But it does not end there either.
Norway’s increasingly becoming rentier. Oil Fund has grown so large that the return of monetary investments will mean more to the fund size in the future than the supply of new oil money.
Unfortunately, the prospects for return gradually become worse in recent years, yes also in recent months. The reason is that the international level is about to set new records – ever lower.
Unfortunately, the prospects for return gradually become worse in recent years, yes also the last months .
The sharp fall in interest rates as the Oil Fund gets when lend money by buying bonds, have not received the same attention as oil prices fell. Almost 40 per cent of the fund is invested in bonds.
In the US, the yield on five-year government bonds slightly over one percent. In Japan, interest rates virtually zero! And when oil fund buys government bonds redeemable in five and ten years, yes it is the interest rate bound as long.
The reason for low interest rates even on long term bonds are particularly expectations of prolonged slow growth in the world economy. Weak growth in the world economy is also a bad sign for the return on the fund’s large holdings of shares.
If it lasts ….
It’s been three years since Governor Øystein Olsen warned that the return on the Oil Fund would hardly be as high as previously thought – four percent (beyond inflation). Later the chief of the Oil Fund, Yngve Slyngstad, said it stronger.
Between the lines have SLYNGSTAD message been that three percent is very optimistic.
If interest rates are low and in addition begins eating of bank account, the overall impact on government finances become great in the long term.
Siv Jensen will get tighter when the budget for 2016 will be sewn together. But her successors as finance minister can get a far greater challenge.
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