Oil Riches Convert Tiny Norway Into Arabia of the Arctic

By , Special to The Christian Science Monitor

It's the little things that signal Norway is a country with money to burn. Boutiques are pricey, and restaurants crowded. Taxi meters tick away into the stratosphere. An air of confidence pervades sunlit streets.

Then there's real estate. Norwegians are paying as much as 50 percent more than just four years ago in a go-go market like the United States during the late '80s.

"We have more money than a few years ago and lots of oil," explains Kjetil Avensen, manager of Gunnar Krogsveen Associatesan, an Oslo real estate company.

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Oil riches have turned Norway's consumers into the Arabs of the Arctic, and their government officials into sheikhs of the snow country.

Indeed, Norway's oil riches in recent years have translated into a big budget surplus that's expected only to grow, making this tiny country of 4.5 million people a net lender. That's at a time when Norway's neighbors are trying to rein in debt to meet the standards for the euro, Europe's proposed single currency.

If the Labor government, in power since 1989, has one "problem" it's perhaps that it has "too much money," says one official.

The government can't spend too much or high inflation and unemployment will follow. Likewise, the country can't allow its currency to become too strong or it will hurt non-oil-exporting industries.

So the Labor government has been walking a delicate line, preaching restraint in spending while trying to show it's in touch with the electorate's desire for keeping social welfare benefits, with an eye on upcoming elections in September.

"Almost every day we see the finance minister arguing for fiscal discipline," says Bjorn Erik Rasch, a political scientist at the University of Oslo.

The Labor Party is banking that voters will accept their message, even if it's difficult to swallow. What voters don't want, says a Labor Party spokesman, is a return to the high inflation and unemployment of the 1980s. During the '80s, the government used oil revenues to balance the budget.

"Maybe [our message] isn't popular," says Guttorn Lushagen, Labor Party spokesman. "[But] we have a history, and people trust us."

While the opposition Conservative Party wants to cut taxes and trim spending, smaller opposition parties from the center and left want to spend more of the country's oil money. They say Labor is exaggerating its claims of inflation.

"We'd like to spend more oil money inside Norway," says Bjorn Guddjorgsrud of the Socialist Left, which advocates spending more on education. "Most people think oil is our most important resource; [but in fact] it's human capital."

Since oil was discovered in the North Sea in 1968, Norway has been steadily increasing production. The country now pumps out three times the oil it did a decade ago, making Norway second in exports only to Saudi Arabia.

Even though oil production is expected to peak within the next five years, some analysts say those estimates are overly conservative. The country also has substantial natural gas reserves to provide a cushion for declining oil resources.

Norway, will try to learn lessons from its own history of depleted oil revenues, as well as from other governments whose energy riches have slipped away:

* The Dutch discovered huge fields of natural gas in the 1960s. But after they began selling it abroad, the influx of money into their economy lifted the currency on the exchange markets and made other industries noncompetitive.

* Venezuela has a similar story, with its oil boom ending in the early 1980s following excessive government spending, corruption, and political chaos.

* Alaska is 80 percent dependent on oil taxes and royalties for its state budget. The state has to borrow millions of dollars from its reserve funds when oil prices unexpectedly nosedive.

"Our lesson of the '80s was the same as Holland's," says Ole Gunnar Auftvick, an energy economics expert from the Norwegian School of Management in Oslo.

To inject discipline and avoid spending too much, the Norwegian General Assembly, the Storting, created a fund for petroleum revenues in 1990 and is investing in foreign currency. By 2001, the fund is expected to increase to 410 billion krone ($61.5 billion) - roughly 40 percent of today's gross domestic product.

Opposition parties scored a victory in December when Labor lost a budget battle and was forced to spend 2.2 billion krone more than it proposed, largely on funds for local governments and health care. Supplementary budget discussions in June are likely to result in more education spending.

Meanwhile, a coalition of the Center, Christian Democrat, and Liberal Parties is mounting a challenge to the Labor Party. If they're successful, "[then] you'd have a policy of more spending," says Dag Harald Claes, a scholar from the Fridjof Nansen Institute in Oslo.

Time will tell if Norway can manage its wealth in the long term. If the oil market remains stable, the country should meet its increasing pension obligations in the coming years with no problem.

"Not too many countries have this kind of experience [or] the opportunity to spend this kind of money," says Svein Andersen, also of the Norwegian School of Management.

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