TIL 34: Playing long-term games
In 1969, Norway struck oil. One of the world’s largest offshore oilfields was discovered in Norway.
This is was a huge deal. Prior to this, the only natural resource Norway had was its fisheries. Being an oil-rich country could do wonders for its economy.
But Norway had a long-term vision. The Norwegian government realized being an oil economy has its own perils.
They based their understanding on something called the ‘Dutch Fever’.
Similar to Norway, Netherlands had acquired a huge resource of Natural Gas within its country.
Realizing they’ve discovered gold, the Dutch government doubled down on Natural Gas as the country’s primary resource. Several Natural Gas plants were set up within the country and Natural Gas was imported to several other countries. The cash was funneled in again on government expenditure to set up more plants and produce more Natural gas.
The result was- as soon as the money started flowing into the country, its currency became more and more expensive. As a result, Netherlands ’ trade with other countries declined.
And consequently, Netherlands had to shut down the plants and rely on its other natural resources resulting in an impending financial crisis.
The Norwegian took a lesson from this and realized oil may not last forever.
It decided to save all of this oil money and store it in a sovereign wealth fund called- The Norway Government Pension Funds.
So what are sovereign wealth funds?
While the definition is debatable, a simplistic understating is that it's a financial reserve created by the government as a long-term savings plan so that both current and future generations could benefit from its oil wealth.
According to the website of Norges Bank:
The funds in the reserve are diversified into several institutions. Although revenue from oil and gas production is transferred to the fund, these deposits account for only less than half the value of the fund.
Most of it has been earned by investing in equities, fixed income, and real estate.
The fund is now one of the world’s largest funds, owning almost 1.5 percent of all shares in the world’s listed companies. This means that we have holdings in around 9,000 companies worldwide, entitling us to a small share of their profits each year. In addition, the fund owns hundreds of buildings in some of the world’s leading cities, which generate rental income for us. The fund also receives a steady flow of income from lending to countries and companies. By spreading our investments widely, we reduce the risk of the fund losing money.
And while the government cannot directly dip into the funds, it can use the interest rate on it (which as of now is 3%) to invest in a wide array of developmental projects.
The value of the fund is up for public viewing on Norges Bank, the Central Bank of Norway’s website. As of now, it’s 1.1 trillion dollars- accounting for $248,000 per citizen.
This makes these funds one of the largest central reserves any government has, protecting Norwegian citizens from any impending crisis in the long term.