Throwback Thriday

Den's been digging in the FT archives back to 2009, the first year of our lord Satoshi.

Plunged down some excellent rabbit-hole reading on the Norwegian oil fund/natural resource management, how to balance Dutch disease (#877076) with handouts-for-international-conglomerates #1514062, #1512219, the story of Farouk al-Kasim emerged.

Down on his knees, the opportunity of a lifetime popped out in front of himDown on his knees, the opportunity of a lifetime popped out in front of him

...and modern-day Norway's wealth and petroleum-exploration expertise owes him basically everything.

In the 1950s, this hard-working and talented young Iraqi qualified for a program to go study in the UK to become a petroleum engineer, on the London-HQ'd Iraqi oil company's dime — with the expectation to return and work for them thereafter.

While in London, he (serendipity #1) met his future wife, a Norwegian woman named Solfrid. They married and she came with him to Iraq while he worked his decade of duties. They had three children, one of whom suffered greatly from cerebral palsy (serendipity #2, albeit pretty tragic one). They decided to uproot their pretty prosperous Basra life in the late-'60s, and thus forefeit al-Kasim's high position in the nation's oil business, to seek medical care in Norway.

Once there, al-Kasim has no idea what to do. Different land, different language and culture, no skills they require, nothing to do. "I'll somehow manage, find a job," dude reasons. On a day with nothing to do, he rocks up to the Norwegian Ministry of Industry and asks, by chance are you good sirs doing any oil exploration?

HELL YEAH WE ARE!!HELL YEAH WE ARE!!

(Serendipity #3: It's astonishing how often serendipity like this is involved in various innovation/revolution stories.)

For years, there had been explorations in the North Sea, some meek attempts at trying to find something. All winding down; results were bad, no oil to be found. They hired him on the spot to analyze some findings and write reports.

His was a lonely, contrarian voice. After examining exploration results, he wrote a report that warned Norway was sleeping, that even though no one had found oil yet, it was only a question of time. And time was short: the country’s leaders needed to prepare Norway to become an oil nation, but they were doing nothing.

Oil companies were starting to leave Norway. Well after well had turned out dry and Phillips Petroleum, the first company to explore the Norwegian continental shelf and the last one still searching, was getting ready to throw in the towel. In summer 1969, it asked to be relieved of the final exploration well remaining in its work programme. The government’s oil office refused: if Phillips did not drill the well, it would have to pay a fee equal to the cost of drilling. Realising it would be cheaper just to drill, Phillips went ahead one last time. This well banished any thought of leaving. Forty years ago this December, Phillips declared the Ekofisk field one of the world’s largest offshore oil basins.

(Serendipidy #4... could have just ended before it started. I'm reminded of JK Rowling and the publishers turning away Harry Potter...)

"Overnight, Norway turned into a hydrocarbon superpower.""Overnight, Norway turned into a hydrocarbon superpower."

Today, it is the world’s sixth-biggest net exporter of oil and thesecond-biggest net natural gas exporter. In the years since the Ekofisk discovery, the country has exported oil and gas equivalent to some 30 billion barrels of crude – and the continental shelf still contains, by official estimates, almost twice as much again. Yet the country has escaped the problems that beset most other oil exporters. Rather than stifling productivity, the oil sector has spawned world-class exploration, oil services and construction technology.

al-Kasim contributed greatly to the trickiest balancing act there is in natural resource management:al-Kasim contributed greatly to the trickiest balancing act there is in natural resource management:

Poor countries dream of finding oil like poor people fantasise about winning the lottery. But the dream often turns into a nightmare as new oil exporters realise that their treasure brings more trouble than help

The Dutch disease is an economic phenomenon where the discovery of an abundant natural resource plunges the country into poverty/stagnation via:

• capital flowing in, pushing up the local currency such that no other industry becomes internationally competitive. All eggs in one basket, and the country ends up doing nothing but exporting that one resource.
• concentrates economic rents and wealth in the resource extracting industries, meaning rules/rulers neglect citizen and don't become responsive to the population. Dictatorship, extreme wealth concentration, insecure property rights etc.

How to extract maximum oil, incentivize investment, benefit the community yet NOT suffer Dutch disease?How to extract maximum oil, incentivize investment, benefit the community yet NOT suffer Dutch disease?

al-Kasim's balancing act between short-sighted capitalist runoff and disastrous socialist rundown is impressive, too (Citing from Lars Doucet's excellent piece at Progress and Poverty)

Norway’s system stands in stark contrast to the two most common models for natural resource management—the “capitalist” approach of letting private companies do whatever they want to and run off with the Natural Dividend, and the “socialist” approach of nationalizing everything with no regard for incentives, causing competence to flee and investment to dry up, when they’re not setting the ocean on fire.

A few key components for the Norwegian success story:

• extremely high tax rates on net profits from oil extracted. (78%, per Doucet's longer rundown)
• extremely generous deductions for R&D and exploration costs (the way Doucet puts this is taking away the up-front financial risk of investing)
• Added extra benefit: you don't have to do this filthy oil exploration business in unsafe, lawless territories but in safe, capitalist-ish places with reliable transparent rule of law.
• Revenue raised goes into a fund, initially to safeguard future generations ("after the oil runs out"), but accidentally negates the Dutch disease by putting reverse pressure on the currency

That last bit is the most underappreciated genius by the Norwegians: take all that money and instead of short-termism/high time preference spend it on social goodies (MY BOOMERS, THEY NEED A GOOD LIFE RIGHT?!), you invest the money in foreign assets,

• like stocks: Norwegian oil fund owns some 1% of all world's listed companies
• and real estate: some properties on the fanciest streets of New York or Paris.

(Around the same time, the UK also found oil in the North Sea -- a windfall benefit it completely squandered and probably benefited that country's economy only marginally #1482318)

Thus, for all the investments in equipment and rigs and exploration pressuring USD->NOK, the government simultaneously takes a decent chunk of what these companies earn and plunges it into a NOK->USD trade by acquiring assets on the New York and London stock exchanges. (Serendipidy #5)

Also, al-Kasim made the companies squeeze every last drop of oil wells available, turning the Norwegian operators into some of the world's most skilled engineers and petroleum geologists:

Most of the oil found in the world is never recovered: the average extraction rate worldwide is around 25 per cent. Norway averages 45 per cent, and for that, Olsen gives al-Kasim much of the credit: he pushed the government to increase extraction rates; insisted that companies try new technologies, such as water injection in chalk reservoirs or horizontal drilling; and threatened to withdraw operating licences from companies that balked.

At one point [al-Kasim] sighed that young people today have little knowledge of what Norway did in order to succeed. That sounds like the typical complaint of a 73-year-old, but in this case, the disappointment is justified. Norwegians of my generation, born when the oil started to flow, largely take our country’s success for granted. So do many observers abroad, who tend to attribute it to some exceptional feature of Norway’s institutions and national character. This version of events leaves little room for luck, or for outsiders.

Thus, some one-fifth of the entire Norwegian economy is just oil exploration/servicing/business. They benefited greatly, and they became respected expert for it, with benefits scattered all around.

My god, this was a nice fucking read. Highly recommend.My god, this was a nice fucking read. Highly recommend.

archive: https://archive.md/oCzHu