Norway’s future without oil

A rapid shut down of Norwegian gas and oil extraction is necessary to be in line with the Paris agreement. The loss of GDP may only be 1% in 2050 compared to business as usual.

The Norwegian environmental movement and an increasing number of political parties and organisations in Norway are advocating a forced shutdown of the Norwegian petroleum industry. The warnings from the oil industry and their allies have consistently been that this might lead to an economic and social catastrophe, with a loss of vital income for society, loss of revenue for the government and loss of employment for a large number of people.

Those in favour of an early shutdown of the oil and gas fields argue that this will reduce the total amount of CO₂ released to the atmosphere, and it is necessary if Norway wants to fulfil its obligations under the Paris Agreement. If the average global temperature increase due to the greenhouse effect is to be limited to well below 2 °C, and ideally below 1.5 °C, Norway cannot continue exploiting the oil and gas reserves at the same rate as before. The International Energy Agency (IAE) has traditionally been a solid supporter of the oil industry. But the IEA recently published a scenario showing that if the world as a whole is to honour the Paris Agreement, there is no need for any new oil and gas fields. This means that active oil and gas exploration should stop immediately, including in Norway. This was a shock for the Norwegian oil industry, and for the majority of the political parties. So far, the majority refuses to face the inevitable.

Politicians shy away from doing the necessary, fearing the loss of votes. This includes the present Prime Minister, Erna Solberg, and the majority of the political parties in the Norwegian Parliament. New leases for oil exploration has until recently been issued in the most vulnerable sectors of the Norwegian off-shore areas in the Barents Sea in the far north. It is reasonably certain that Norway, after the recent Parliamentary elections, will form a new coalition government between the Labour Party and one or two smaller parties. The Labour Party has so far said that oil exploration and production will continue as before, and so has one of the two possible coalition partners, the Centre Party. The other possible coalition partner, the Socialist Left Party, wants to phase out oil production and exploration. How the programme of the new government will turn out, is still not clear at the time of writing (mid-September 2021).

The economic arguments and the consequences for employment in the Norwegian economy weigh heavily in the debate about a forced shutdown of the oil sector. Around 100,000 jobs depend on the present level of oil and gas exploitation. This is a significant number in a country of no more than 5.4 million people. The oil price collapsed around 2014. This caused a loss of 36,000 jobs in the oil sector alone because of cut-backs in the industry. Similar consequences are easy to envision with a rapid shutdown of the oil industry to protect the world’s climate.

It is obvious that the forced shutdown of the oil and gas industry cannot take place without an active strategy to stimulate the creation of employment and absorb the loss of jobs in the oil sector. The oil industry chooses to either ignore these possibilities, or argue that no employment in other sectors will be able to compensate for the loss of the oil jobs. A coalition of environmental NGOs, trade unions, church organisations and others have therefore established something called “Broen til framtiden” – or “The Bridge to the Future”. The coalition organises a yearly conference where the alternatives to the oil business are explored. It has also sponsored several reports with the same theme. The aim is to foster a just transition to the new economy without the present heavy dependence on the petroleum sector.

The “Bridge to the Future” coalition wanted to study the consequences of a forced shutdown for the economy and for the employment. So it sponsored a report from the Norwegian Central Bureau of Statistics – SSB. The report1 looked at two different scenarios: in the first scenario the government stopped giving out new permits for exploration and stopped the issue of new leases for areas of exploration. In the other scenario a reduction of new leases for exploration was combined with changes in the tax regime for the oil companies. The conclusion was that both would have very modest economic consequences. In the least-severe alternative, the GDP of onshore Norway would be reduced by 0.5 per cent, compared to the business-as-usual reference development. This is only one third of the expected yearly growth in GDP. The impact on public spending would also be very small, because the money used in the government budget comes from the so-called Oil Fund (the Norwegian Pension Fund Global), and not directly from oil revenues. The number of people unemployed would increase by 6,500 at most, which is 0.2 per cent of the workforce.

In the other scenario, a reduction in exploration areas combined with changes in the tax regime would reduce the oil companies’ incentives. This would mean a full stop in the issuing of new licenses from 2022. From 2025 several tax incentives will be removed. The CO2 tax and the cost for emission trading quotas are gradually increased. The combination of measures in this alternative may also cause a faster phasing-out of petroleum activity from existing fields already in production. The economic consequences would be more severe, but it would also give faster transitional effects and ensure that more oil and gas will remain in the ground. The loss of GDP will still only be 1 per cent in 2050 compared to the business-as-usual scenario. This is still less than the expected annual growth of the economy. The unemployment will rate will be clearly higher, by 0.5 percentage points. So there will be a greater need for active investments and job creation to compensate for the job losses in the petroleum sector. Right before the recent Parliamentary elections, the sitting right-centre government announced a change in the taxation regime for the oil industry in line with this scenario. The effect of the real changes in the taxation regime might be smaller than in the scenario, but it will be in the right direction. What is clear is that the tax incentives for oil exploration will be removed. This will have a positive effect in the long term in the form of reduced exploration activity, but it will not have the same short-to-medium effect as a full stop in issuing new licences.

Connie Hedegaard, the former EU Commissioner for Climate Action, headed a two-person commission responsible for a report in 2016 on the green transition of the Norwegian economy. Norway needs new green employment opportunities and growth that can replace the expected downturn in the petroleum-related sectors. The report defines green competitiveness as high value creation and full employment in a society with reduced CHG emissions. Existing and new workplaces must transition themselves to compete, and value creation must take place in a resource-efficient low-emission society.

The report advised the Norwegian government on how Norway should achieve a competitive green transition to a low-emission society in 2050. The most important conclusions were that Norway had committed itself to reduce emissions of GHGs. (In 2020 the government committed Norway to a reduction of at least 50% by 2030 compared to 1990 levels.) The development of new technologies, new materials and new business models opens up new opportunities. Falling costs for zero-emission technologies lead to rapid growth of renewable energy. The petroleum sector in Norway will no longer be the same growth engine in the economy. The extraction of oil and gas had probably already reached a maximum, and is on its way down. A de-carbonisation of the world economy will reduce the demand for oil and gas in the future. As an example of a development that will reduce the demand for petroleum products, the report mentioned that electric cars would increase in numbers. In 2021, developments in Norway at least show that the report was right. In 2021 the number of electric/hybrid cars in Norway has already increased to 25 per cent of the total. In 2020, 55 per cent of all new cars sold were electric/hybrid. The Norwegian government’s ambition is that by 2025 only zero-emission vehicles will be sold. This will reduce domestic demand for auto fuel considerably.

The realisation that something must change, and that the oil and gas industry will not go on forever, is starting to sink in. One alternative after another has been proclaimed by the media as “The next oil”. Realistically, the harvesting of a limited non-renewable resource such as oil and gas will never make a comeback. Not in Norway, and not in the world. But Norway has a lot going for it. Norway has a highly educated workforce, an advanced technological and scientific base, a solid economy, and not least the so-called Nordic model for the relations between labour and capital. Generous unemployment benefits increase the flexibility of the workforce. Changes in the economy and new opportunities for wealth creation to replace declining petroleum-related activities will therefore be less painful than in many other countries.

Where will the new employment be created? This must be speculation, and few would venture to predict exactly where, in what sectors of the economy and how many new jobs will be created. Some of the new employment will probably be in traditional sectors such as marine resources, where Norway already is a major player. But a word of caution is that automation and technology might lead to less labour-intensive harvesting of all marine and other natural resources. The new employment is more likely to be in the technology and services sector, and in many cases in technology that has not been invented yet. The changes in the economy in recent decades have been enormous, and much of it has not been foreseen in detail. There is all the more reason to expect that the changes in the future will be big, and equally unpredictable in detail, although the larger trends are easier to predict. Less dependence on the petroleum sector is a given fact that Norwegian society is gradually adapting itself to.

Tore Braend

¹ https://www.ssb.no/nasjonalregnskap-og-konjunkturer/artikler-og-publikas...