Hydrocarbons in Greenland – Prospects for the Greenlandic Economy

Abstract: There are high hopes in Greenland that the country will go from being a nation of fishermen to a nation of oil producers. But what do we really know about the prospects? Our thesis investigates how favourable the geological, economic and institutional conditions are for building a self-­sustaining economy in Greenland based on its hydrocarbon resources. The geological conclusions are encouraging. Greenland has a 50% probability of finding at least 29% of Norway’s ultimately recoverable resources and a 95% probability of finding at least 8%. This is a significant number considering the size of the Greenlandic population that is only 1% of the Norwegian. We therefore conclude that there are favourable geological conditions to make Greenland self­‐sustaining. The economic conclusions show that there is a 61% probability of replacing the block grant with current oil prices. This indicates that it is possible that Greenland can become self-­sustaining. However, replacing the block grant is not enough to keep the government budget balanced assuming current policies. Additionally, the possibility for Greenland to become significantly richer is negligible at current oil prices. We therefore conclude that the current optimism surrounding the oil industry is exaggerated. Large direct government oil income affects an economy through the Dutch disease, which decreases the competitiveness of the exporting industry. We find that Greenland already suffers from Dutch disease and that it is caused by the block grant. An oil economy would probably retain, or aggravate, these effects. The resource curse may cause economic growth to be lower in natural resource rich countries. Collier & Hoeffler (2005) find that scrutiny, and especially press freedom, can prevent the curse. We show that scrutiny in Greenland is functioning and improving but that there are some problems left. Primarily, the administration can be made more transparent and the media can be strengthened. Our conclusion is that it is impossible to guarantee that the institutional situation is sufficient to avoid the resource curse. The institutional capabilities are especially important as the Greenlandic Mineral Resource Fund will be central to control the Dutch disease. Based on our results, we recommend policymakers in Greenland to lower the expectations on the oil industry and to try to lower the risk exposure towards it. We recommend a focus on improving institutions, as this will have positive effects regardless of how much oil is found. Finally, we recommend that the Greenlandic Mineral Resource Fund is used restrictively and that the management of it is kept separated from the government budget. This is important to manage the Dutch disease and to make sure that the resources will benefit also future generations.