The dilemma between the commencement of the project for its handful revenue and persisting on keeping the region intact for the safety of existing traditional industries can be highlighted even more with the understanding of how revenue management from oil and gas works. A precise explanation of resource revenue management has been given below to enable readers to understand long term impact that the oil revenue will have on the economy of many rich countries and helps readers evaluate how serious is it to ban such projects.
2.5.1 Background and Rationale for Resource Revenue Management:
Norway has implemented ad-hoc financial strategies to administer the adoption of the nation's resources, particularly about the extraction of oil and gas. These policies assist in reducing the procyclicality of the economic rule and in regulating the execution of the resource incomes towards long-term sustainability goals (Mohn, 2016). To disseminate the paybacks from oil and gas extraction income to future generations, the Norwegian administration initiated a self-governing wealth fund through which all resource incomes are placed. The bird-in-hand (BIH) rule permits only the consumption of resource incomes that have already been discharged. The policy is meant to decrease the macroeconomic effect of the resource incomes through leveling the expenditure outlook of these returns (Mohn, 2016). The disadvantage of the bird-in-hand
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policy is that it ignores future spending obligations associated with aging and other population dynamics.
Norwegian administration places its revenue from oil and gas extraction in a stabilization account and draws 4 % yearly from this reverse to fund its tax cuts or public expenditure. Its approach of handling resource returns is commonly regarded as a perfect example for other resource-rich nations to emulate (Landsem, 2016 ). Thus, Norway adopts a BIH policy even though the administration leaves adequate room for preference when appropriate. The BIH policy states that the administration allocates all hydrocarbon returns in the account and only takes out 4 % of the total amount in the previous financial period for the overall budget. The 4
% resembles the hypothetical real rate of return on the reserve (Landsem, 2016 ). For instance, in a period where the real growth rate equals to 2%, the progression corrected real return on the BIH reserve should be equal to 2% to make the overall proportion 4% (Landsem, 2016 ).
On the other hand, the permanent-income hypothesis (PIH) is the standard approach of intertemporal usage behavior by private households. PIH states that variations in permanent revenue, as opposed to changes in temporary return, are the components that drive the changes in the user's consumption behavior (Mohn, 2016). The hypothesis adopts balanced forward-looking performance and indicates that a household’s present consumption relies on projected future interest rates and returns. The permanent-income hypothesis is rejected in Norway concerning the management of resources from the extraction of oil and gas.
2.5.2 Critical Characteristics of the Norwegian Government Pension Fund (GPFG):
GPFG (Government Pension Fund Global) which in other words is the Oil Fund (Visbeck et al., 2017) is the first GPFG was established in 1990 with the primary aim as investing surplus revenues emanating from the Norwegian petroleum sector. Currently, it serves as the world's largest sovereign wealth fund. GPFG also holds real estate as well as fixed-income investments. Some of the historical aspect leading to the formation of GPFG include the investment and fiscal policy which have prolonged time (Mohn, 2016). GPFG has had a positive impact in a way which allows the Norwegian government to manage all assets belonging to oil and sustain oil revenues in a way which saves and creates wealth for generations to come. GPFG name was found in 2006. GPFG is not independent as it was formed to be an investment account by the Central Bank of Norway. GPFG is under the
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ministry of finance which has the finality in determining the investment strategy as well as ethical guidelines of the fund and all operational management by the Norges Bank
.
The Norwegian fiscal policy structure ensures conserving the actual value of the fund for the welfare of upcoming generations. Also, the fiscal rule and the Fund isolates the budget from short-term changes in oil and gas incomes and leave room for the financial rule to neutralize economic recessions (Landsem, 2016). In case of considerable movements in terms of the factors which impact the operational non-oil monetary discrepancy or the value of the Fund, the modification in the consumption of petroleum income is levelled over a number of years, centered on an evaluation of the real rate of return of the reverse several years ahead (Landsem, 2016 ).
With the EU enlargement in 2004, the Norwegian labor market and labor migration were affected. In the same way, the Dutch disease effects were modified during the 2004-2013 boom. The Norwegian case involving resource movement majorly affected the petroleum industry. The introduction of fiscal policy limited the spending (Visbeck et al., 2017). In this case, the economic growth in Norway doubled in this period due to the boom in resources while the population increased at a rate of 2%. The resource movement was reduced by 2% due to immigration.
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Part Three: Theoretical Positioning
In this part, major economic theories and concepts that are relevant in justifying our point of analysis in this research project work will be discussed. From amongst so many concepts whose relevance cannot be questioned in helping understand our point of the argument, we are limited to the most important ones including the green paradox and hoteling model; Dutch disease and the resource curse; theory of social welfare loss and the concept of opportunity cost.