For the town of Glomfjord in Norway’s Arctic, the country’s oil boom has turned into a curse.
Unemployment has more than doubled, people are moving out, and schools now risk being shut after solar-energy component maker Renewable Energy Corp. (REC) ASA closed a 200-person plant in March before moving production abroad to cut costs.
“It’s an earthquake -- a catastrophe,” said Per Swensen, the 65-year-old mayor of Meloey, a district of 6,600 people scattered across 755 islands that includes Glomfjord, in an interview last month. “It has dramatic consequences.”
Glomfjord and towns like it are victims of a deepening economic divide sparked by an oil rush that’s transformed Norway into Europe’s second-largest producer. While the boom has turned some fishing villages into affluent towns with costs rivaling Zurich and Tokyo, it has also turned Norway into Europe’s most expensive place to do business. That’s hobbling the ability of towns and regions far from Norway’s oil resources to keep up.
“I would like to have a bit more than one leg to stand on today and in the future,” said Hilde Bjoernland, a professor of economics at the Norwegian Business School in Oslo. “What we’re doing now is cutting away at one of the legs.”
Norway’s economy risks becoming flooded by oil more than four decades after it was discovered 180 miles off Norway’s southwestern coast in 1969. Average manufacturing labor costs are about $57.5 an hour, 31 percent more than in Germany and 65 percent more than the U.S, according to the U.S. Labor Department. Complicating life for exporters, Norway’s krone has surged 24 percent against a basket of currencies from its trading partners in the past 3 1/2 years as investors seek an oil-rich haven from the global financial crisis.
That’s making it hard for companies outside the oil industry to evolve and thrive even as the economy expands amid a contraction in the euro area. Of Norway’s 20 biggest listed companies, only one non-oil related company, cancer drugmaker Algeta ASA (ALGETA), has been founded in the past 40 years. Of the companies, half are either directly involved in oil production or service the industry with rigs and equipment.
Annett Kildal, an engineer, found herself part of that trend this year after she lost her job at the REC plant, Glomfjord’s largest employer at the time.
“People were angry and frustrated,” said Kildal, who last year bought a home nearby. “The village has 1,100 people. And now that REC is bankrupt you get even angrier over how it’s possible in Norway that companies can act like REC.”
She then found a ‘perfect job” in the oil industry 1,300 kilometers south in Bergen. REC’s Norwegian Wafer unit filed for bankruptcy.
To be sure, Norway’s oil boom has transformed the country into the envy of many. The third-richest nation per capita has an unemployment rate of less than 3 percent and offers its citizens free health care and education. It has a lock on the top spot in the annual United Nations human development index and has amassed a $640 billion sovereign-wealth fund from its oil revenue, amounting to $128,000 per inhabitant. The government limits spending of oil revenue to 4 percent of the fund, to ease the effects of wealth on the economy.
“We’re sitting on easy street,” said Arne Joakimsen, who owns 22 restaurants and bars on Norway’s west coast and in the city of Stavanger, the nation’s oil capital. “I feel we are very, very lucky.”
The oil dividend is nevertheless causing problems for the welfare state as the cost-of-living climbs across the country. In Stavanger, a town that has shed its reliance on sardine cannery and fishing to become a city crammed with expats and upscale restaurants, local authorities can’t find enough healthcare workers who can afford to live there.
“We are lacking many specialized nurses,” said Nina Horpestad, head of the Norwegian Nurses Organization for the local county, who is trying to fill as many as 40 vacancies.
House prices in Stavanger have tripled since 2000 to 40,000 kroner ($6,740) a square meter as employees from Exxon Mobil Corp. (XOM:US), Total SA (FP) and other oil giants pour into the town, according to the Association of Real Estate Brokers. That compares to about $8,589 for the top 10 most expensive London areas.
The city is the fifth-most expensive in the world, beating Geneva and Zurich and coming in 35 spots ahead of Manhattan in New York, according to an ECA International’s Worldwide Cost of Living Survey from March. Oslo was the second-most expensive after Tokyo.
“One of the biggest challenges for me as a mayor is those who don’t work in the oil sector,” said Mayor Christine Sagen Helgoe, 44, who is the granddaughter of the first head of Texaco in Norway. “They don’t earn that much and it is difficult for people to be engineers in the municipality or nurses or pre- school teachers -- that type of personnel -- in a region that has so many possibilities in the oil industry.”
Norwegian oil is likely to keep gushing for many decades to come. Since 2010, Statoil ASA (STL) and Sweden’s Lundin Petroleum AB (LUPE) made separate discoveries in the North Sea that are estimated to be the biggest since the 1970s.
Ola Steinsnes, the supervisor who oversaw Statoil’s drilling, said the discovery was reminiscent of the Klondike gold finds, the last big North American gold rush in the late 1800s.
“It was overwhelming because none of us, even though there were many that had a lot of experience, had seen such a mighty core sandstone sample,” said the almost 30-year offshore veteran in an interview. “There was so much oil running out of the core that we needed to collect it in bottles.”
The discovery will allow the nation of 5 million people to delay the eventual end of a 40-year oil era as oil output has dropped about 50 percent over the past decade because of dwindling reserves in the North Sea.
That will help power growth in a country that was mostly reliant on fishing, mining, shipping and timber for its exports 40 years ago. The mainland economy, which strips out oil and gas production, has expanded an average 2.6 percent over the past decade, compared with 1.1 percent in the euro region.
Petroleum production has added more than $1.5 trillion to Norway’s gross domestic product over the past four decades, according to the government and an estimated 250,000 people work in jobs directly or indirectly linked to the oil industry, according to the Finance Ministry.
Credit default swaps also show Norway is the least likely to default on its sovereign debt. The country’s five-year CDS traded at about 21 basis points, more than 50 percent below Germany’s 48 basis points. Credit default swaps allow traders to bet on the probability of a debt default.
At the same time, the oil largesse prompted a warning earlier this year from Norway’s central bank Governor Oeystein Olsen, who helped design a fiscal rule while at the Finance Ministry early last decade.
Olsen says that the government can now deploy so much money from the oil reserve that other parts of the economy will get strangled.
The governor warned in February of the loss of “entire industries” and called for the spending limit to be cut to 3 percent of the fund’s value to ease pressure on the economy. Spending risks “crowding out exposed sectors,” Olsen said.
Excluding oil revenue, Norway has run a deficit every year since at least 1980, according to budget reports. The structural, trended deficit, a measure of how much oil income is used to plug shortfalls, is estimated to reach 5.2 percent of mainland gross domestic product, which excludes oil and gas output, this year.
In Meloey, the mayor is now counting the people moving away and dreading the lost revenue. About 50 people had moved as of July 1, he said.
“We hope to prevent as many as possible from moving away and get them into jobs here, but if that many leave then our finances will not allow us to have so many schools and such a decentralized community,” he said.
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