Norway’s $1 Trillion Oil Fund Worried Over Market Crisis

In 2008, as the global financial system crashed, the investment portfolio of Norway’s oil fund had its worst year ever, yet the sovereign fund managed to increase in size.

Its equities and bond investments dropped 23% that year. But the world’s largest sovereign wealth fund was saved by both a big inflow of money from Norway’s petroleum revenues as oil prices remained high and a large boost from the exchange rate as the krone weakened, Yahoo reported.

Many are now wondering what would happen to Norway’s $1 trillion oil fund if things are different in the next crisis. The fund itself warned last week that a crash could wipe away more than 40% of its value, particularly if the Norwegian krone became a safe haven currency and strengthened.

That has many experts worried that one of the few sovereign wealth funds located in a democracy could be drained rapidly in a real market crisis.

“The fund is untested in a crisis. The political system is untested in a crisis. By being poorly prepared we are running the risk of screwing the fund,” says Espen Henriksen, associate professor at the BI business school in Oslo and an ex-fund official.

The problem is that Norway’s government has become increasingly used to the doping the oil fund provides for the state budget. Under the so-called spending rule, which was revised last year, the government is allowed to use up to 3% of the fund annually. This year it will use about 2.9%, or NKr231 billion ($29.70 billion).

That is a record amount in krone, and represents fully 18% of total government spending.