What's the best way to handle gas wealth? Ask Norway
Policymakers in Jerusalem should emulate Norway's prudent handling of the discovery of gas reserves to prevent the outbreak of economically destructive 'Dutch Disease.'
In 1969, the people of Norway understood their luck had taken a favorable turn. A drilling rig by called the Ocean Viking had discovered an offshore oil field. Within a couple of decades, Norway became one of the world's biggest oil producers.
For its part, the Norwegian government wasn't blinded by the newfound riches, and it made several strategic decisions that proved wise. Policymakers' ability to predict the problems generated by the country's newfound oil wealth and their decision to think seriously about how to deal with these problems were impressive.
Norway's government decided not to join Organization of Petroleum Exporting Countries, allow it to sell oil at market prices. More important, the government decided that all the revenues the country earned from its oil would be placed in a sovereign wealth fund and not included in the annual government budget. Lastly, it decided to create a government-owned oil company that would specialize in sea-based oil drilling, which is considered a knowledge-intensive field. Norway's state-owned oil company, Statoil, spans the globe today and has become partly private over the years.
The Norwegian government decided that the cash windfall it expected to receive from oil discoveries would likely turn out to be a more of a curse than a blessing and that it would therefore be better to let the money accumulate in a dedicated fund. Norway had prior knowledge of this problem, known as “Dutch disease,” a term that describes the economic problems that affected the Dutch economy after the country discovered natural gas reserves in the North Sea a decade earlier.
In the case of the Dutch, earnings from natural gas exports flowed directly into the country's economy, causing an appreciation in the national currency that wiped out exporters in other economic sectors and created inflationary pressure and a large degree of financial self-indulgence on the part of the general population. Instead of following this route, the Norwegians are saving their oil revenues for future generations and reaping the ancillary benefits of their oil discoveries, like gained industrial expertise, job creation (the Norwegian oil industry employs roughly 80,000 people today) and the development of shipping industry and ports.
The Norwegian government will put its sovereign wealth fund to use in future decades after the country's oil wells have run dry. The sources of the fund's money are Statoil dividends and taxes and royalty payments from independent oil companies that operate in Norway. Today, the fund manages about $650 billion, all of which is invested in assets outside of Norway in economic sectors that do not affect the local economy, allowing the country to control inflationary pressures and spread investment risk.
The investment strategy of Norway's sovereign wealth fund, called the Government Pension Fund Global, is to invest against the business cycle. Since 2007, the fund has increased its stock portfolio holdings from 40 to 60 percent of total investments. At present, the sovereign fund owns one percent of all publicly traded companies in the world. But its investment policy dictates that if stock markets decline and its stock holdings drop by more than four percent as a proportion of total investments, it will immediately undertake activities to bring its stock holdings back to 60 percent of its investment portfolio. Likewise, when its stock portfolio rises in relation to its non-stock investments, the fund sells its stock holding until its portfolio is back at 60 percent of total fund investments. In other words, it buys stocks as the markets decline and sells stock as the markets climb.
This counter-cyclical investment policy helped Norway's fund deal with the giant losses caused by the financial crash in 2008. Moreover, in 2000, the fund's investment managers began investing in developing countries' securities to take advantage of their growth at a time when the West's population is aging.
Although Norway's sovereign wealth fund decided not to invest in most Israeli real estate companies (because they are active in the occupied territories) or security companies, it would be a good thing if Israeli policy makers copied the Norwegian model for dealing with rapid gains in wealth.
Ran Shaham is co-CEO and proprietary account manager at the Altshuler Shaham Group investment firm. Yotam Ironi is a financial analyst at Altshuler Shaham Group. This article should not be construed as containing investment advice or recommendations regarding the purchase or sale of securities.
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