The oil bust has come to this: Norway's model of big production, light consumption is under strain

It is a capitalist country, but it is dominated by state-owned enterprises; it is an oil giant, but it eschews conspicuous consumption.

For decades, this unusual economic model has served Norway well. However, the model is beginning to run out of fuel.

Norway's rise to glory began when the first oil was extracted from its continental shelf in 1971. The energy industry sent ripples of prosperity throughout the economy, turning Bergen from a fishing village into an industrial hub, creating companies that specialized in extracting hydrocarbons from beneath a stormy sea and filling hotels with oil workers.

The ripples got ever bigger as the oil price lurched upward from $10 a barrel in the late 1990s to almost $150 in 2008. Oil and gas now account for about a quarter of Norway's GDP and almost half of its exports.

But the recent fall in the oil price to around $50 has put this into reverse. Statoil, the national oil company, has seen its profits and share price plunge. Oil firms have laid off 10 percent of their workforce and may lay off another 20 percent. Just as worrying for a country that excels at producing equipment for extracting oil from deep beneath the sea is the rise of a fracking industry that uses different technology to blast oil and gas out of shale beds.

The oil bust is exposing two weaknesses in the Norwegian model.

One is bureaucratization, born of Norway's enthusiastic embrace of state capitalism. The government owns about 40 percent of the stock market, with large stakes in Telenor, a big telecom operator; Norsk Hydro, an aluminum producer; Yara, a fertilizer-maker; and DNB, a bank, as well as Statoil. That leads to a monochromatic corporate culture. The Norwegians like to boast that they lead the world in corporate diversity because firms are legally obliged to reserve 40 percent of board seats for women. But sexual balance does not make up for cultural uniformity: many of the country's most senior businesspeople studied together at the Norwegian School of Economics, and still live in each other's pockets.

In 2011, Norway spent 3.9 percent of GDP on incapacity benefits and early retirement, compared with an OECD average of 2.2 percent. Norwegians have coined a verb, to "NAV", meaning to get money from NAV, the state benefits agency.

The country still has a lot going for it. The Norwegian Pension Fund Global is perhaps the most impressive example of long-term thinking by any Western government. Rather than squandering its oil riches, Norway is saving them in a sovereign-wealth fund that is now the world's biggest, at $873 billion.

Norway has fish as well as oil in its waters, and exports around $10 billion worth of them a year, a decent sum for a country of just 5 million people.

Thomas Farstad, the boss of Norway Seafoods, a private-sector fish trader, says that Norway's refusal to join the European Union has made things difficult for his industry. Fishing companies are forced to concentrate on volume because they have to pay high tariffs on exports of processed fish into the E.U. But this also means that they have a free hand to manage their own fisheries which, he adds, have never been healthier.

Despite the emphasis on volume, the industry has changed dramatically. Aquaculture has gone from nothing in 1970 to accounting for 70 percent of Norway's total catch. Traditional fishermen are also moving up the value chain, using more efficient ships to reduce manpower and dredging up stuff from ever deeper in the ocean, including plankton which can be used in health foods.

Fredriksen lives in London, holds a Cypriot passport and has a most un-Scandinavian relish for splashing his money about. Rokke used complex financial engineering to turn a rundown shipyard in Oslo into a bustling shopping district. Kjos has taken on Norway's powerful unions by, for example, basing planes in Spain and using Spanish flight crews. Norwegian Air has been more consistently profitable than its rival, SAS, and gets better ratings for service.

With the oil price looking as if it may remain depressed for some time, however, Norway desperately needs to give corporate Vikings like these more room to grow. It also needs to apply the same enterprise to reforming its welfare state.

The country's reaction so far to the oil-price drop has been to embrace socialism more firmly: In local elections on Sept. 14 the left made big gains in most of the country's big cities, including Oslo and Bergen, on a program of higher spending and zero reform.

Harder times are likely to prompt more serious thought. Norway is fortunate in that it can learn from neighboring countries, with similar cultures, that have implemented wide-ranging reforms. Sweden, in particular, has reinvigorated its model by shrinking its state, allowing private firms to run its schools, hospitals and surgeries, and reducing its tax burden. During the oil boom Norway got used to importing young Swedes to serve in bars and restaurants. Now its best chance of continued prosperity lies in importing not just people from Sweden but ideas, too.

Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.