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On Christmas Eve 1969, the nation of Norway received a massive Christmas present. After years of failed drilling attempts, Norway announced they had discovered one of the largest oil reserves on Earth.
This remarkable find would immediately transform Norway from a quiet, industrial, and fishing-based economy into one of the world’s ten largest exporters of fossil fuels.
Unlike other countries with massive natural resources, Norway adopted a long-term strategy to invest its oil revenue.
Learn more about the Norwegian Sovereign Wealth Fund on this episode of Everything Everywhere Daily.
In 1959, a team of Shell and Standard Oil researchers on a quiet beet farm in the Dutch province of Groningen struck a large pocket of natural gas. Subsequent discoveries began to pop up across the region, revealing the world’s largest natural gas reserves, estimated at nearly 100 trillion cubic feet.
This discovery prompted an oil and gas exploration boom in northern Europe.
At first, Norway did not even have clearly defined offshore petroleum rights. In 1962, the American oil company Phillips Petroleum asked the Norwegian government for permission to explore the Norwegian continental shelf, reportedly offering a large sum in exchange for exclusive rights.
The government rejected the idea of giving the shelf to a single company, but the request alerted Norwegian officials to the area’s potential value.
Norway then moved quickly to establish sovereignty over its offshore resources. In 1963, the government declared that the natural resources of the Norwegian continental shelf belonged to the Norwegian state. Norway also negotiated boundaries with Denmark and Britain, largely using the “median line” principle, in which offshore territory was divided according to the midpoint between neighboring coastlines.
In 1966, the Norwegian government partnered with several international companies, including Phillips, Esso, Shell, and others. Despite its commitment to preventing foreign control of its oil, Norway had to rely on foreign companies for exploration because it lacked domestic expertise in the petroleum industry.
After years of failing to find oil, hope began to fade.
By 1969, Phillips Petroleum was reportedly considering a reduction in its exploration efforts. Before abandoning one of its remaining prospects, however, the company drilled another well in Block 2/4, about 300 kilometers southwest of the city of Stavanger, known as the Ekofisk site.
It struck oil.
When drilling began in 1971, it was believed the well would run dry by 1988. However, generations of Norwegian scientists focused on improving the technology at the drill site have extended the life of the well and others in the region far beyond those original estimates.
Norway adopted technological breakthroughs in offshore drilling from the United States and the British and expanded on them, taking into account the realities of the North Sea Oil Shelf.
Norwegian scientists have developed 4D technology to track oil movements, new extraction methods to increase well capacity, and subsea rigs that operate on the ocean floor far away from the dangerous conditions above.
While the original Ekofisk well has long been exhausted, other wells in the system are still producing at maximum capacity. Norwegian geologists estimate that the region’s oil reserves are still at nearly 50%, with high hopes that Norwegian scientists’ can continue to maximize oil extraction.
To date, the region has produced an estimated 54 billion barrels of oil. While oil prices have fluctuated, the net proceeds from its sale are estimated to exceed $1 trillion.
These oil proceeds look even more impressive when you consider that Norway’s population was less than 4 million when the Ekofisk well struck and is projected to be 5.6 million in 2026, an astonishing resource base for a country with the population of Berlin.
This episode, however, is not really about Norway’s petroleum industry. It is about what they decided to do with the money. For many countries with large oil reserves, petroleum production can be just as much a blessing as a curse.
Oil-rich countries tend to experience more corruption, authoritarianism, and economic instability because governments can rely on petroleum revenues instead of taxes and broad-based economic development.
After the discovery of oil in 1969, Norway established principles to guide its oil management. In the summer of 1971, the government issued Norway’s 10 Oil Commandments.
The edict focused on ensuring that foreign interests would not dominate the benefits of the discovery and that the discovery would be carried out in an environmentally conscious manner.
These principles were applauded in 1971 and remain in place today. Perhaps the most influential section of the 10 Commandments was its preamble, which sets out the program’s goals, stating: The petroleum resources must be managed in a way that ensures they benefit the entire Norwegian community.
To this end, the Norwegian government established a Sovereign Wealth Fund, a state-owned investment portfolio, to benefit the country in perpetuity.
Norway recognised as early as a 1983 government report that it needed to avoid what economists call “Dutch Disease.” The Economist coined the term “Dutch Disease” to describe the adverse impact of an immediate influx of natural gas wealth on the Netherlands.
The influx of foreign capital tends to strengthen the country’s currency and attract labour and investment to the oil and gas sector, making other exports, such as manufacturing and agriculture, more expensive and less competitive abroad. Over time, those non-oil and gas sectors can shrink, leaving the economy unusually dependent on the resource industry.
Soaring costs led to an unemployment crisis in the Netherlands, as Dutch industries were forced to lay off workers due to slumping sales at home and abroad. Unemployment data during the Dutch Disease crisis vary, but general estimates indicate unemployment doubled from less than 4 percent to nearly 8 percent. The Dutch took the short view, hoping immediate consumption would fuel permanent growth.
The Netherlands wasn’t the only country which had to deal with massive sudden inflows of oil and gas money.
In the Persian Gulf States, the oil crisis of the 1970s led to huge increases in crude oil prices. Global oil prices surged and eventually quadrupled over the decade, inundating the Gulf States with tons o foreign cash.
Unlike Norway or the Netherlands, the Gulf States didn’t have many domestic industries. They used their money to make new non-oil and gas industries.
The Gulf States are similar in that oil revenue flows directly into the government, and residents do not pay income taxes. Each of these states handled its influx of oil revenue differently. Saudi Arabia used its vast oil wealth to build modern infrastructure across the country and help reimagine the Arabian Peninsula as a technological hub.
Qatar used the North Field, one of the world’s largest natural gas deposits, to buy an impressive suite of foreign assets, and to fund the nation’s 2022 World Cup, which cost a staggering $220 billion, an amount that they will almost certainly never come close to recouping.
Abu Dhabi and Dubai in the United Arab Emirates, took different paths. Dubai is smaller and has fewer oil reserves than its fellow Emirate and has focused on making Dubai an international destination for travel and business. Dubai built Jebel Ali, the world’s largest man-made harbor, and operates arguably the world’s most famous and glamorous airline, Emirates.
Abu Dhabi has greater oil reserves and has allocated its wealth differently. Abu Dhabi has invested substantially in the nation, focusing on infrastructure improvements and modernization. Abu Dhabi also created its own Sovereign Wealth Fund, but it operates with a very different set of objectives and utilizes a much more aggressive investment strategy.
Compared to the Gulf States, Norway chose a far more disciplined and democratic path. The Norwegian fund is currently valued at just over 2 trillion dollars, nearly 20% larger than the Emirates fund. Norway’s Parliament established the fund by law in 1990 amid great fanfare.
Norway made its first deposits into the fund in 1996. The six-year gap in the deposit schedule occurred because the Norwegians used the original proceeds to cover the massive start-up costs of building the oil infrastructure in the 1970s.
The 1980s saw Norway dedicate much of the oil revenue to a series of infrastructure projects across the country. Beginning in 1996, Norway invested 100% of the oil revenue into its fund, which was renamed Norges Bank Investment Management in 1998.
The fund has a remarkable feature that no other fund of its kind can claim: it cannot invest in Norwegian interests. This might seem very counterintuitive, but this mandate blocks domestic corruption, prevents crony capitalism, and directly addresses the potent effects of the Dutch Disease.
Equally impressive, in 2004, the fund added another unique quality: it created a Council of Ethics. The Council established rules prohibiting the fund from investing in foreign companies that commit human rights abuses, cause environmental damage, or profit from tobacco.
The fund’s investments can be tracked on the government website, which shows exactly how much the fund is worth at any given time and what it is invested in.
Today, the investment portfolio spans more than 9,000 companies worldwide and is built on a platform of equity investments, fixed-income products, and international real estate.
The fund’s consistency is truly a remarkable achievement for any government, but particularly for a democratic government. Political winds have shifted in Norway since 1996, yet regardless of which party is in power, the government and the voters haven’t changed the fund.
Abandoning the fund or its goals has never been a real consideration since it was established. The fund even weathered the global financial crisis of 2008 without political debate over a strategy change, even as its value plummeted alongside the world’s stock markets.
The fund’s growing success certainly adds to its legitimacy; each of the more than 5.5 million Norwegians is technically worth more than $400,000 thanks to the fund. Yet the fund doesn’t allow Norwegians to claim their individual shares.
The fund’s purpose is clarified in its foundational documents: The purpose of the Government Pension Fund is to support government savings to finance pension expenditure under the National Insurance Scheme and to support long-term considerations in the spending of government petroleum revenues, so that the petroleum wealth benefits both current and future generations.
Norway’s sovereign wealth fund gives it a much stronger financial cushion for future pension costs than most heavily indebted European countries have.
That matters for pensions because Norway does not rely solely on future taxpayers to finance future retirees. It has an enormous pool of invested assets that can help support government spending as the population ages. In economic terms, Norway has partially pre-funded the fiscal burden associated with future pensions.
Many other European countries operate much more heavily on a pay-as-you-go basis. Current workers pay taxes and social insurance contributions, and that money is used to pay current retirees.
That system can work well when there are many workers for every retiree, but it becomes more difficult as birth rates fall and populations age. Governments then have to raise taxes, cut benefits, raise the retirement age, or borrow more money.
The Norwegian fund’s formula allows the system to be maintained by withdrawing only 3% of the fund’s interest to cover government expenditures. By borrowing only from accrued interest, the fund preserves the principal as a legacy for all Norwegians, present and future.
If all the oil in Norway were to dry up tomorrow, Norway’s Sovereign Wealth Fund would continue to benefit the people of Norway for decades, maybe even longer. It is all because they had the foresight, and more importantly, the discipline, not to squander their petroleum windfall.