The Price of Oil & Exchange Rates: How does the oil price affect the Norwegian Krone?

Martine Kopstad Vanvik & Søren Sjøgren Iversen

Student thesis: Master thesis


Inspired by the striking fall in the Norwegian krone, which has coincided with the oil price’s tumble since June of last year, this thesis will investigate the impact of oil on the Norwegian currency. The aim of the paper is to give an understanding of how dependent the Norwegian economy and currency are on the country’s petroleum sector. Relevant subjects like the possibility of Dutch disease and the role of the country’s sovereign wealth fund in the Norwegian economy will also be looked into. However, the main research question of the thesis is: “How does the oil price affect the Norwegian krone?” The thesis presents relevant history of the Norwegian economy from the time of oil discovery in 1969 to the present date in order to reveal the country’s financial state as well as its dependence on oil. It is found that the oil sector is the country’s largest and most important industry, constituting over half of Norway’s exports, which makes the country largely dependent on the price of oil, and thus the forces shaping the oil market. Furthermore, the government and central bank’s measures to improve the economy and the country’s terms of trade are described. This part also involves the functions of the Norwegian sovereign wealth fund in the economy. With the purpose of understanding which forces shape the price of oil, the world’s largest producers, exporters and importers of oil are listed. Graphical evidence is provided to show the co-movements between the Norwegian currency and the price of Brent crude oil. Although the sovereign wealth fund was established to diminish this dependence, events in the economic history of Norway are often found to coincide with fluctuations in the oil price, as the development in the real exchange rate of the krone closely co-moves with the price of oil through the 16-year observation period. This also seemed true for other currencies of oil exporting countries. Currencies of net oil importing countries presented ambiguous results. By thoroughly investigating the development of a number of exchange rates through graphical evidence and OLS-regression models, the thesis finds that oil price has had a larger impact on several currencies including the Norwegian krone after the financial crisis in 2008/2009. For oil exporting countries’ currencies, the oil price increasing has mostly led to an appreciation against foreign currencies. Through use of theory and extensive historical research the thesis concludes that the Norwegian terms of trade will improve when the price of oil is low. However, as the country and the krone are quite dependent on oil, a lower oil price can have severe consequences for the Norwegian economy if the price of oil stays low over a longer period of time than we have seen so far. Nevertheless, the Government Pension Fund - Global should be capable of securing the Norwegian economy against a crash due to a prolonged situation of a low oil price, and is considered to be the main reason for the lack of evidence of Dutch disease in Norwegian economy to date.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2015
Number of pages163