Capital Rationing and Business Cycles in the Norwegian Petroleum Industry

We analyse business cycles of oil and gas investment on the Norwegian continental shelf. Investment declined steeply from 2014 until 2017, following business cycle-induced cost increase and a subsequent dramatic drop in the oil price. Two competing hypotheses emerged in the literature, as to whether the downturn is transitory and part of the cyclical nature of the business, or if it is a permanent shock caused by the emergence of climate risk. We apply various techniques to extract the cyclical component of petroleum investment. The results show that the recent recession was not more severe in terms of duration compared to previous crises, and that it was transitory. However, the change in cyclical component from peak to trough was more extreme than anything observed previously. After an upturn of only two years and while the capital-intensive parts of the supplier industry were not yet recovered, in March 2020 the pandemic COVID-19 and oil price war caused another dramatic oil price reduction. We discuss the counter-cyclical tax policy passed by the Norwegian Parliament in light of the oil companies’ practice of capital rationing and an explicit aim of ensuring the survival of the supplier industry.