Trillion Dollar Baby | Paul Cleary

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Published in: 2017

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In 1814, sovereignty was transferred from the King of Denmark to the King of Sweden. The Constitution of Norway was signed on May 17, later to be celebrated as Norwegian Constitution Day. It was not until 1905, after 400 years of Danish or Swedish control, that Norway became independent. Norway was at this point a middle-income country with a GDP per capita just shy of Greece. Norway now has one of the highest socio-economic standard of living in the world. This book the story of how oil have led Norway to build up a wealth fund of over $1,000 billion.

A SHIPPING AND WATER NATION. Since the 19th century, Norway had been the base for global shipping companies, and in the early 20th century, ca 10% of global tonnage was registered in Norway. Soon after the independence, foreign investments started to tick up and the final version of the “concession law” was hammered through. The state wanted to ensure that the natural that the natural resources (mainly water / hydropower) would be returned after being developed by foreign investors.

GROWTH POST WWII. After the second world war (Norway was occupied by Nazi Germany 1940-1945) it was clear that the existing industries was not enough to increase the population’s standard of living. Some countries had by then became interested in underwater resources (in 1938, the first oil platform was built in the Gulf of Mexico) but in Norway, most people were pessimistic about the chances of finding oil off the Norwegian coast. Luckily, foreign companies were more inclined to take risks.

PHILIPS PETROLEUM INITIATES DRILLING. In 1962, Phillips Petroleum applied for exclusive rights to test drill on the Norwegian coast. The Norwegian state established a similar legal framework that had been used for hydropower a few decades earlier (at this time, most water resources were in the hands of or in the transfer to the state).

FINDING EKOFISK. In 1969, Phillips found the Ekofisk field, with 3.5 billion barrels of oil and 162 billion cubic meters of gas. Production began in 1971. The state feared the social and economic consequences of an oil boom, such as when the Groningen gas field had destroyed the Dutch economy in the 1960s. Norwegian companies were only present with minor efforts in only 21 of the 78 blocks. But following the discovery of Ekofisk, the government declared that they will take a direct shareholding in the fields allocated in the future. In the licensing round in 1969, the state’s interest varied between 5% to 40%.

STATOIL AND THE OIL CRISIS. Statoil was founded in 1972 with 5 MNOK in share capital and a year later, the state invested an additional 150 MNOK in the company. At the end of 1973, Statoil had fifty employees. In the same year, the Arab oil producers, who formed the OPEC cartel, reduced production, which quadrupled the price of oil. This posed a challenge for the new oil-rich nation, but Norway had now learnt the oil industry. Production at Ekofisk increased to about 60 million barrels of oil per year.

STILL NOT MADE. In 1974, the Statfjord oil field was discovered, and production began in 1979. As a result of the state financing 50% share of the development cost, national borrowing increased and in the late 1970s Norway had a deficit of 11% of GDP, due to capital imports. In the late 1970s, the state raised the special oil tax (which is paid in addition to the normal corporation tax of 50.8%) from 25% to 40%. Companies threated to leave Norway.

THE GOLDEN YEARS. In the late 1970s oil revenues began to take off and the state had successfully harvested the lion’s share of the profits from oil production. In 1979, Troll, another “super-giant field”, was discovered by Shell. Between 1976 and 1980, oil revenues increased 15x from a combination of rising production, rising oil prices and higher taxes. The banks opened up the credit rules in the 1980s, and in a few years the Oslo Stock Exchange had quadrupled in value. Property prices doubled between 1983 and 1987.

EMERGING SOURRUNDING INDUSTRY. The Norwegian diving company 3X studied the equipment and systems that the French company Comex imported to Stavanger. The Norwegian shipping magnate Fred Olsen then bought 3X and developed the business. From the early 1980s divers were replaced by remote-controlled robots. Aker, which already in 1966 built the Ocean Viking drill that was used in the first licensing round, was also quick to take advantage of the opportunities that the North Sea and the state’s helpful push provided.

THE FIRST BIG HANGOVER. In 1986 the oil price was halved ($12 per barrel). Oil revenues decreased from NOK 35 billion to NOK 6 billion between 1985 and 1988. To attract investors, the state reduced the special tax rate on oil production from then 35% to 30% and announced that royalties would not be applied to new areas. The Norwegian economy went into a deep recession that triggered credit losses for all Norwegian banks, causing a “bank run”. Government intervention was needed to save the banks.

LEARNING FROM OTHERS. “The Dutch Disease” has been part of the political debate since the 70s. The government now began analyzing Alaska, which established the Alaska Permanent Fund in 1976 through a constitutional amendment that stipulates that 25% of all oil-based revenues be retained and the remainder distributed to citizens (c.  $2,000 per year). The Canadian state of Alberta had also set up a fund (which was looted by politicians and today has assets of only $17 billion).

”THE OIL FUND”. In 1990, the Government Petroleum Fund was created (today the Government Pension Fund Global) and in 1996 the first deposit was made in the New Petroleum Fund. Initially, the capital was invested only in risk-free government bonds, but in 1998 the managers began investing in equities in 21 countries. Since 1992, the Norwegian currency has flowed freely and by putting the fund capital in foreign currency, the pressure on the Norwegian krona decreased. This means that the fund can invest in foreign assets at relatively lower prices during the boom years when the krona is stronger. In 2007, equity investments increased from 40% to 60% and since 2008, the fund has been allowed to invest in real estate. The fund passed one trillion dollars in 2017.

STILL RELIANT ON OIL. Norway has not discovered any new “super-giant fields” since the late 70’s (Troll was the last). In 2010, however, the Swedish company Lundin Petroleum, with the help of new technology, found the medium-sized field Johan Svedrup in an explored area 150 km outside Stavanger. Johan Svedrup is about half the size of Ekofisk. Norway’s dependence on oil is reflected in a lack of interest in developing new sources of renewable energy, especially offshore wind power. While Denmark, the United Kingdom and Germany in 2010 had developed a significant sustainable aquaculture industry, there is no comparable investments in Norway even though the natural conditions are better in Norway. In 2010, Sweden had approximately 10,000 gigawatt hours of wind power capacity, more than five times as large as Norway. However, there was no country with more electric cars per capita in 2017 than Norway.

AVOIDED ”THE RESROUCE CURSE”. Developing countries with large raw material resources are at risk of “the resource curse”. Corruption and greed make the inhabitants worse off because of the findings. Norway created a policy that made it possible for the state to take a direct share in oil fields without major exploration costs. This has been more important than the special tax. The Norwegian state currently owns 67% of Statoil (one of the world’s twenty largest oil companies).

BETTER THAN OTHER OIL COUNTRIES. Canada has a comparable energy and minerals sector like Norway but has a small wealth fund. Australia failed to build a “rainy-day fund” during the biggest commodity boom. Admittedly, there is the Future Fund, but its assets of $87 billion are earmarked for future pensions for civil servants. In the early 2000s, Australia’s foreign debt amounted to about $300 billion. By March 2016, it had increased to $750 billion (approximately 60% of GDP). When Norway invests assets in foreign currency, the krona has been less volatile than what commodity-based economies such as Canada, Australia and New Zealand have experienced.

More on Norway here on Libraryof

The Heavy Water War

The King’s Choice


Start-up nation | Senor and Singer

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Published in: 2009


Israel has the highest density of innovation and entrepreneurship in the world, a total of 3,850 start-ups, one for every 1,844 Israelis. The country also has the highest density in the world of engineers and R & D spending as well as more companies on the NASDAQ stock exchange than all of Europe. Almost half of the world’s largest technology companies have bought start-ups or opened research and development centers in Israel. In 2006, Warren Buffett broke his decade-long suite of not buying foreign companies with the 80% acquisition of Israeli Iscar Metalworking (for $4.5 billion).

“I’m not Jewish, but Israel reminds me of the United States after its birth. The determination, motivation, intelligence and initiative of its people are remarkable and extraordinary. I’m a big believer in Israel’s economy.” – Warren Buffett

YOUNG AND HUNGRY. Since its founding in 1948 and the number of inhabitants has increased from 0.8 to 7.1 million in sixty years. Immigrants do not mind restarting and adversity increases ingenuity. Foreign-born citizens of Israel today account for over a third of the country’s population and Israel is home to more than seventy different nationalities and cultures. A nation of immigrants is a nation of entrepreneurs (applies to both the United States and Israel). 45% of Israelis have a university degree, which is among the highest percentages in the world.

SURROUNDED BY ENEMIES. Israel’s neighbors Lebanon, Syria, Palestine, Egypt and Iran have, to a greater or lesser degree, stated goals of destroying their neighbor. With limited ability to transport by land (as well as expensive shipping costs to other markets due to distance), it has been natural for Israelis to develop the Internet, software, computers and telecommunications areas. Every major telephone company in the world depends on Israeli telecom equipment and software.

MATTER BEFORE PERSON. The compulsory military service is at least 18 months where the inhabitants are brought up in a culture of treating all results – both successful and unsuccessful – as value-neutral. As long as the risk is taken intelligently, and not ruthlessly, there is something to be learned. In the military, taxi drivers can be the boss of businessmen and 23-year-olds superior to their uncles. Israeli soldiers are not defined by rank, they are defined by what they are good at, and this de-dramatized view of authority is a catalyst for innovation.

THE FIRST BIG STEP. From 1948 to 1970, GDP per capita quadrupled while the population tripled – despite involvement in three major wars. From 1950 to 1960, Israel grew just under 10% annually. During the early development stage, there were easily identifiable opportunities for large-scale investments: roads, water systems, factories, ports, electricity networks and housing construction. In retrospect, it is clear that Israel’s economic performance occurred in part due to government interference. Per capita income relative to the United States increased from 25% in 1950 to 60% in 1970.

ISRAEL’S LOST DECEADE. From the mid-1970s to the mid-1980s, Israel’s “lost decade” lasted. Part of this was due to rising oil prices and reduced immigration. The cars on the roads were bad imports or bad domestic productions. The banking system and the government’s financial regulations were as outdated as the car industry. It was illegal to exchange dollars except at banks and holding a foreign bank account was illegal. Inflation rose from 13% in 1971 to 111% in 1979. Israeli inflation rose to 133% in 1980 and to 445% in 1984. A series of reforms then got the country back on track.

THE SECOND GREAT LEAP. The second major step was from 1990 to the present, during which time Israel was transformed into a leading center for global innovation. Unlike other small and endangered countries such as South Korea, Singapore and Taiwan (all with good growth), none of them have created an entrepreneurial culture comparable to Israel’s. After the financial crisis, the focus on innovation has become more important. When entrepreneurs succeed, they revolutionize the markets. When they fail, they still maintain existing ones with constant competitive pressure, thus stimulating progress.


Eritrea | Paul Frigyes

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According to the World Bank, Eritrea had an average income of $490 in 2013, less than a third of the average in sub-Saharan Africa. In the same year, the Human Development Index ranked Eritrea as 182 out of 187 countries based on criteria such as life expectancy, education and GDP (life expectancy is 63 years and the average time in school is 4.1 years). In the World Bank’s report 2015 on conditions for conducting trade, Eritrea is in last place (189). Amnesty has reported thousands of political prisoners and the UN human rights rapporteur has been denied access to the country. The country has been living under UN sanctions since 2009.

A “Brief” on the book can be read here.