Understanding the Norwegian Petroleum Industry: How does Oil explain Norwegian Public Expenditure and Social Spending? How vulnerable is it to shocks?

Abstract: There are few people who deny that Norway's social welfare was achieved after Oil Discoveries. But there is concern about the sustainability of the Norwegian economy regarding the volatility of the Oil market. This study provides a quantitative analysis of the relationship between Central Government Expenditure and Oil exports plus vulnerabilities measured by Gold to Oil ratio, Exchange Rate Volatility and Export to Import ratio. The aim of the study is to see if Norway has achieved independence from Oil in its Social Public Spending and for that reason after testing for cointegration, a VEC analysis is performed, in order to observe the impulse response functions of the variables of interests to shocks in their vulnerabilities. The results show that the country had a strong dependency from Oil between 1978-1996 but then managed to became resilient to such shocks plus those in Oil and financial markets and Balance of Payments.