The alternative to a fund would have been to directly regulate production by putting a conservative upper limit on annual extraction. This was attempted in the 1970s and -80s. At that time, we had a production ceiling of 90 million standard cubic metres per year. This approach was abandoned in the 1980s. Today, the government steers exploration activities  BIS Review 81/2008  1  and awards production licenses, but has no explicit production target. Since the mid-1990s, total petroleum production has been around 250 million standard cubic metres per year. The Fund mechanism The Fund is by law fully integrated with the government budget, and the same priorities are imposed on spending from the Fund as on any other government spending. This means that the entire petroleum revenues are transferred to the Fund. An amount equal to the non-oil budget deficit is then transferred to the fiscal budget. The mechanism ensures that the accumulation of capital in the Fund is equal to government net financial savings. There is no corresponding increase in liabilities. Furthermore, legislation prohibits use of Fund money for purposes not prioritised in the regular budget processes. There is no hidden use of oil money, or any use for special purposes. The Fund is strictly and effectively “out of bounds” to special interests.
Norges Bank manages parts of the funds internally, while parts are managed by external managers appointed by the Bank on a commercial basis. Active management has become an important part of our investment operations. We believe that the search for excess return has had a strong disciplinary effect on the organisation. Transparency and disclosure of information is a key feature of the Fund. All investment principles and guidelines as well as strategic advice and second opinion reports are made public. We publish quarterly reports on Fund performance, which are presented at press conferences. The Fund’s annual report discloses a list of every single investment held at the end of the year, and also provides an overview of corporate governance work, including voting at general meetings. Initially, transparency was aimed at building confidence among Norwegians, but we have also seen that our policy of transparency is highly appreciated internationally. The challenges for the Norwegian economy The risk of “Dutch disease” 1 is often cited when discussing the impact of natural resource windfalls. 2 Dutch disease occurs when the basis for internationally exposed industries is eroded and fluctuations in economic activity are amplified. In our case, we can say “so far so good”. The economy has been fairly stable and oil price fluctuations have only had a moderate impact on our currency. Furthermore, while it is difficult to know how the economy would have developed without oil, we have a sort of “control group”.