New report: Modest economic consequences from reduced oil extraction in Norway

A new report from Norway’s statistics agency shows that a reduction in the country’s oil and gas industry would only affect economic activity by the equivalent of one year’s GDP growth over the next 30 years, and will otherwise have modest effects – due, among other things, to increased competitiveness in the rest of the economy and greater space for a just transition.

“The report shows that the oil industry’s scare tactics have no basis in reality. Political measures to downsize petroleum extraction will naturally have costs, but the Norwegian economy will continue to grow, even with a relatively rapid phasing out of oil and gas production. This is good news for everyone working for a green, just transition,” commented Silje Ask Lundberg, leader of Friends of the Earth Norway.

Over the last few years, several researchers have argued that reduced oil production in Norway would contribute to reduced carbon emissions globally, but some have feared that this would have disastrous consequences for the Norwegian economy and welfare state. However, by stopping the allocation of new exploration areas and tightening the favourable tax regime for the petroleum industry, the report from Statistics Norway shows that, within 30 years, GDP in mainland Norway will be reduced by between 0.5 and 1 per cent compared with a reference scenario.

“No-one is saying that transforming an oil-dependent economy like Norway’s is going to be easy. Nevertheless, we know that the climate emergency will cost us even more. This report shows that ending new oil and gas exploration will be a relatively cheap measure to provide greater predictability in a just transition and prevent risky fossil investments in areas like the Arctic,” Lundberg stated.

The report does not consider the risk of losses if the oil industry becomes less profitable in the time ahead; rather, it assumes a stable oil price until 2050. The report also does not evaluate the opportunities Norway has for growth or job creation in existing and new green industries. Several reports have shown that the potential for green jobs in Norway is very high.

“The biggest challenge with reduced petroleum activity will not be whether the Norwegian economy as a whole survives or if government revenues can be maintained, but how we can ensure decent, secure jobs for everyone in the industries that must transition away from oil and gas. This will require politicians that take a lead and introduce the necessary measures for a just transition,” Lundberg concluded.

Background on Statistics Norway’s report

Statistics Norway researchers Finn Roar Aune, Ådne Cappelen and Ståle Mæland have looked at two scenarios.

In the first scenario, new oil and gas exploration will stop by the end of 2021. This will have very modest economic consequences, both because production is expected to fall in any case and because the decline in oil activities allows for increased activity in other industries:

  • Over the course of 30 years, GDP in mainland Norway will be reduced by 0.5 per cent compared with the baseline scenario. This is only a third of the expected annual growth.
  • Public revenues are also only affected to a small degree. The oil-related funds used in the state budget come from the “oil fund” (Norway’s sovereign wealth fund), not directly from the petroleum business. Norway can therefore continue to use “oil money” at about the same level as today, even if the fund grows somewhat slower.
  • Reduced oil and gas extraction will promote a transition in the rest of the economy. Parts of industry and primary industries will grow more than they would otherwise have done, while the service and construction sectors will grow slightly less. Mechanical industry will first have reduced growth and then make up for lost time towards 2050.
  • Unemployment will increase by no more than 6,500, which is 0.2 per cent of the labour force. The largest decline comes in the service industry and construction.

In the second scenario, a reduction in new exploration areas is combined with tax changes that reduce oil companies’ incentives for existing production. This will have greater financial consequences, but also have positive effects for the economic transition, and ensure that more oil and gas remain in the ground.

  • In this scenario, GDP for mainland Norway will be about 1 per cent lower in 2050 than it would otherwise be, which is still less than the economy is expected to grow each year.
  • Unemployment will increase by 0.5 percentage points, creating greater need (and room) for measures that build new industries and jobs. The report shows that it is not necessarily jobs in engineering that are most threatened by the restructuring, but rather jobs in the service sector.