The Case of the Norwegian Oil Fund

This post will explain Phaseout Profit Theory with the Norwegian Oil Fund as a case study.

Norway’s share of the North Sea Oil is estimated around 29 billion barrels, with 60% already produced before 2007.

That’s not a lot in a global perspective. World wide reserves are around 1,300 billion barrels.

But it still was enough to run the World’s biggest pension fund. The Norwegian Oil fund held around $712,7 billion in March of this year, or around $145,000 per capita of the Norwegian population.

That’s a fair amount of money, and a good reason why Norway is in no hurry to join the European Union.

But Norway could have done much better if they had just left the whole oil in the ground. 60 percent of 29 billion is 17.4 billion barrels, the amount already sold until 2007. Dividing those $712.7 billion the fund now has by 17,4 billion we find that Norway has left  around $41 per barrel from all that activity.

If they had just left the oil in the ground, that would now be worth $100 per barrel, minus the cost of production.

And if they had left it in the ground that 17,4 billion barrels would have not been on the market. All things equal, that would have raised oil prices.

What the Norwegians have done, they have produced oil and invested the proceeds from that. They have changed their oil assets into stock and other equity.

But it clearly would have been an even better strategy to just simply sit on the oil and wait until prices rise further.

That is exactly what the Phaseout Profit Theory recommends. Leave the oil in the ground, take it off the market, raise prices by doing so, and watch the value of your oil fields soar. That’s a strategy guaranteed to be profitable.

It also happens to solve this little global warming problem we have. But that is only an added benefit. It would work to generate large profits even without that.

 

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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