Why The UK Lost Its Oil Wealth (And Why Norway Didn’t)

published on July 17, 2020

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 Luckily for you, I partnered up with Skillshare, the best online learning platform, to make 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 You can watch my class for free right now if you’re one of the first 500 people to sign up for Skillshare using the link in the description Once you’ve registered search for “investing 101” or follow the link I’ve conveniently left in the comments below I wanna thank the 3 thousand people who have already watched it and who have made it the

Most popular investing series on Skillshare For you guys I can say that I’m working on a second series that dives deeper into the mechanics of stocks and their valuations Hopefully I’ll have that class out by the end of next month, but until then make sure you’ve checked out my current class and consider sharing it around if you liked it The same thing applies, of course, to this video

Thank you for watching it and make sure to subscribe if you haven’t already You’ll be hearing again from me in about two weeks and until then: stay smart

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