Norway's sovereign wealth fund pass 1 trillion US Dollars for the first time

Screen-cap of the fund's value from the Bank of Norway's website detailing the fund. The current value can be seen live during any weekday here

Not a space-related post for a change, but as my bio does read "Norwegian Economist working at the European Space Agency", it is perhaps time to pay some attention to the two first words as well!

Some of you know it well already, but my home country Norway owns the world’s largest sovereign wealth fund. Quite impressive considering Norway's population of just around 5¼ million people. Last night, the fund set a new record passing a total value of 1000 billion US Dollars for the first time. To put its value into perspective, that is almost 200 000$ pr citizen or 1.5 million in the national currency NOK. So while a certain country is breaking new trillion dollar records in debt, it’s nice to reach a new trillion dollar record in the other direction!

Anyways, I thought this was a rather good opportunity to take on my economist-cap and explain the fund’s purpose, investment portfolio, and actual use.

What is the Sovereign Wealth Fund?

In short, the fund is Norway’s savings account from its oil and gas activities that have made it quite rich over the past few decades. Indeed, the fund is often referred to as the "oil fund" due to its value stemming mostly from the country's oil and gas industry. Its purpose is to safeguard the values derived from the oil era to also benefit coming generations. For that reason, it is also frequently called the "government’s pension fund".

The fund was founded based on the idea that the wealth found on the Norwegian continental shelf belongs not to the private entities who extract it but to all Norwegians. Not just Norwegians living today, but to all future generations. Think of it as an attempt to live up to the idea that one should do their best to leave the world a better place than the one we found for the next generation to inherit. Extracting a finite resource and spending its value by definition leaves those who come after with less opportunity as they find a country with fewer resources to use and profit from. (note that this is based on the assumption that oil and gas will still be as valuable to inherit in the future. An assumption that I doubt will stay true for very long. But that’s another post entirely). To compensate for what is taken out of the ground, the fund they inherit shall be at least as valuable as the value of the tax revenues generated from oil and gas activities on the Norwegian continental shelf adjusted for inflation. Therefore, the wealth is not to be spent by this generation of Norwegian citizens but instead saved in the fund. This is a significantly different philosophy than what you will see in any other countries that got wealthy from their national oil industry.

For the country’s money to be saved though, 100% needs to be stored or invested abroad, as it is impossible for any country to save money domestically. It is the job of the Bank of Norway, in which there is a dedicated branch working with the fund, to build an optimal portfolio and to manage it carefully.

The fund is highly international as can be seen in this overview
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The portfolio consists mostly of stocks, followed by bonds. In recent years, the fund has increased its portion in real-estate, buying valuable buildings in London, New York and Paris, among others
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So far, it’s safe to say that they have done a good job, as the fund has seen a 5.9% annual return since it was started in 1990. When accounting both for inflation and the costs of operating the fund, the average annual return is still about 4%. Together with the high taxation on oil and gas in Norway, this has allowed the state to save a lot more than it spends most years, resulting in the steep increase of the fund's value from 47 billion NOK in 1996, to about 8000 billion NOK today.

The value of the fund measured in NOK. Dark blue = stocks, light blue = bonds, and grey = real estate
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The budgetary rule and how the funds’ money is being used

So, does that mean that the current generation get nothing out of the country’s oil wealth?!? No. If you read it carefully, you noticed that I stated that the future generations shall inherit the value of the revenues that were generated after inflation. But that still leaves 4% of annual gains to be used.

Since 2001, all major political parties in Norway, from left to right, have been in agreement on a best practice for how to make use of the funds’ interest, a policy commonly referred to as “the budgetary rule”. In short, it states that the government may not take on a yearly deficit greater than 3% of the wealth fund’s current value. Or stated in reverse: The government may use most of the funds’ interest to finance additional spending beyond its natural income.

With a current value of 1000 billion dollars, this means that every year, the government has an extra 30 billion to spend. To a large extent, this is what allows Norway to run such an ambitious welfare state. It is very common for people in Norway to ask “why don’t we use the money in the fund to pay for schools, hospitals, science, and infrastructure?” The truth is, we are. The annual returns from the fund allow for increased spending in all of the above, and for many years to come.

This sure is a large topic for debate in Norway, and it is bound to receive more attention as the country's oil revenues is set to decrease in coming years.

Found this interesting?
You can see the current value of the fund live here.
You can see a global ranking of sovereign wealth funds in the world here