Great Britain and Norway: the two countries
with the biggest reserves of oil
in the North Sea.
This key strategic resource has been a blessing
for Norway, but its impact on the UK has been
much more questionable.
In this video we’re gonna look at how the
discovery and exploitation of the same resource
resulted in drastically different effects
on these two European countries.
This video is brought to you by Skillshare,
where you can find my very own series of videos
on how the stock market works.
You can watch it for free by registering with
the link in the description.
Up until the Second World War, digging for
oil on the coasts of Western Europe was a
futile endeavor.
Pretty much every country had tried it, of
course, but the numerous wells that had been
dug produced less than a hundred barrels per
day on average: completely insignificant compared
to the vast oil fields of the Middle East.
The North Sea’s oil wasn’t discovered
until the 1960s, and unsurprisingly before
that Norway wasn’t nearly as wealthy as
it is today.
Before the Second World War, the backbone
of the Norwegian economy was fishing and shipping,
which of course they were very good at having
had centuries of experience.
The British, meanwhile, were busy doing their
whole empire thing.
As the leading naval power in the world they
relied heavily on oil, but one of the major
problems with that was the fact that Britain
didn’t have a lot of reserves itself.
Instead, it had to rely on imports, which
is why it supported the global expansion of
Shell and BP, especially in the Middle East.
During the first half of the 20th century
no one thought the North Sea would be a worthwhile
place to extract oil.
It was a dangerous and difficult task to even
try to search for it there, which is why the
extent of its reserves was largely unknown.
In 1958 the Norwegian government itself rejected
the possibility of finding oil, but just one
year later a monumental discovery changed
the outlook of the entire industry.
In the northern part of the Netherlands, Shell
had been looking for oil.
They didn’t find any, but in one of their
wells they found natural gas at large quantities.
Nothing groundbreaking so far, but when they
dug a few more wells in the area they discovered
more gas at the same depth; in other words,
they had stumbled upon a giant gas field.
As it turns out, the one they found was the
largest one in Europe, but what made it truly
significant was its implication for the North
Sea.
You see, the geologies of both areas were
very similar so finding gas in the Netherlands
meant that there might be oil under the North
Sea.
The oil companies scrambled and began their
first explorations in 1962.
Norway didn’t start giving out licenses
until 1965, but they were in no rush.
The stormy weather and still developing technology
meant that whatever oil could be found was
going to be very difficult to extract.
The drilling rigs had to withstand 50 foot
waves and winds of up to seventy miles per
hour, so unsurprisingly it took a few years
and several deadly accidents before the oil
could start flowing.
The first major oil discovery was made in
1969 on the Norwegian side.
Then, in a mad streak of luck, the British
discovered the largest field in the entire
sea on their first try just a year later.
In 1975 Queen Elizabeth herself would inaugurate
the flow of oil from that field and this gesture
symbolized a new opportunity for both Great
Britain and Norway to benefit from this new
resource.
But the way both countries approached their
newfound wealth was radically different.
The Norwegians could afford the luxury of
being patient.
Their political situation was one of stability:
their leading Labor party had been the largest
one since 1927 and is the one responsible
for the welfare state and their high taxes.
In other words, they had no pressure to immediately
spend the oil profits to stimulate the economy
in the hopes of ensuring their reelection.
On top of that, the government’s attitude
towards private companies was aggressive:
they only allowed a 50% ownership stake in
any given well, with the rest being owned
by the state itself.
In 1972 the Norwegians went a step further,
creating an oil company entirely owned by
the state, which would then compete directly
with foreign companies.
Norway was effectively double dipping: not
only did it tax the oil industry excessively,
it also owned a big chunk of it.
But what’s really smart is what the Norwegians
did with all that money: they not only saved
it, but also started investing it.
In 1990 they created a special fund for exactly
this purpose whose growth rate ever since
has been nothing short of exceptional.
They put most of their money in stocks and
bonds, with a dash of real estate sprinkled
on top, and the results speak for themselves.
The Norwegian fund is the largest sovereign
wealth fund in the world and it even passed
a trillion dollars in market value in September
2017.
And keep in mind, that’s a trillion dollars
spread out over just 5 million people.
So by all accounts, the Norwegians handled
their oil boom perfectly.
But the same cannot be said for the British.
The surge of oil profits for Britain coincided
with the rise of Margaret Thatcher.
She came into power in 1979 and instead of
setting up a fund to invest these new profits,
she used that extra money to make radical
reforms to the British economy.
She started a wave of mass privatization of
companies that were otherwise profitable and
made large cuts to income taxes in order to
revitalize an otherwise stagnating economy.
Her policies were successful in that regard
and resulted in large economic growth, but
these benefits were temporary.
Unsurprisingly, when the revenues from oil
started declining, Margaret Thatcher’s house
of cards came crumbling down.
In essence, the UK and Norway took opposite
approaches to their oil money.
The British blew it on tax cuts, while the
Norwegians invested it and grew it to the
point where this tiny nation of 5 million
people is the largest shareholder in Europe.
Norway is a perfect example of why investing
is smart and that’s a lesson we can all
use.
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a 20-minute animated series of videos on how
the stock market works.
If you’re curious how Norway’s investment
fund makes money you’ll learn a lot of the
fundamental things in my class: stuff like
why companies go public or how dividends work.
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