Effects of Norwegian Oil Supply Shocks on the Global Oil Market: Implications for Environmental Policies

Abstract

We examine the effect of Norwegian supply shocks on the global oil market and evaluate the environmental consequences. In our research question, we seek to find out how the global oil market will react if we have a shutdown of Norwegian oil production. The background of Norwegian oil production is discussed, along with previous and ongoing debates on the topic. A shutdown can have different effects depending on whether it is temporary or permanent. To evaluate the effect of a temporary shutdown of Norwegian oil production, we first look at oil market variables after a strike on Norwegian oil platforms in 1986. The strike resulted in a price increase of 27%. Second, we generalize the mechanism by constructing a structural VAR model. Our results show that a shock similar in size to the 1986 strike in today’s context raises the oil price by 6.5%. Long-term global oil production was unchanged in both cases. We apply a conditional forecast to analyse the effects of permanent shocks to Norwegian oil production. Our results suggest that the oil price responds greatly to this shock, while global oil production increases in the first nine months before decreasing and stabilizing at a lower level. We find that less oil is produced in the shutdown scenario, implying that a shutdown may lead to beneficial outcomes for reducing greenhouse gas emissions.