Nick Cunningham writes:  New oil projects are being scrapped in Norway amid falling production and low oil prices. Long held up as the model for managing oil abundance, Norway has painstakingly sought to prevent the problems that occur with other natural-resource-based economies, such as corruption, slow economic growth, currency appreciation and deindustrialization.

Since 1990, Norway has diverted much of its oil earnings to a sovereign wealth fund, which has become the world’s largest. The money, reaching $890 billion as of June 2014, amounts to $178,000 for every Norwegian citizen. The sovereign wealth fund helps Norway avoid some of the problems associated with the “resource curse” by investing capital abroad. But more importantly, the money is set aside to be saved and invested to help the country plan for the eventual decline of oil production and the transfer to a more diversified economy.

The early cracks in Norway’s petrol-based economy are beginning to show more quckly than many predicted. Statoil, the mostly government-owned oil company, has  seen its share price cut in half since July 2014.  Several offshore rigs have stopped drilling.  To make matters worse, costs of developing new fields have been steadily rising.  Since oil prices have tumbled. Norway may see a steep decline in investment.

Lower oil prices could force more than $150 billion worth of investments to be put on hold worldwide.  Statoil is deferring a decision on investing $5.74 billion in the Snorre field, an offshore oil project in the Norwegian Sea. Also, Statoil’s Johan Castberg field, an estimated $16 billion to $19 billion oil field in the Barents Sea, will be tabled.

Even with high oil prices Norway was facing a tougher future due to years of waning oil production. Since 2001, Norway’s oil production has fallen by almost half, from around 3.5 million barrels per day down to about 1.8 or 1.9 million barrels per day in 2014.

The decline in investment is already pinching the labor market. About 10,000 Norwegian oil workers have been laid off as the industry pares back spending, accounting for 10 percent of the sector’s total workforce. Oil workers are threatening to strike unless the government steps in to stem further losses.

Despite its best efforts, Norway’s economy is overwhelmingly dependent on oil, which accounts for more than half of the country’s exports. Other export industries have struggled to develop, as costs are too high.  It doesn’t make sense for many companies in Norway to invest in new projects. Spending could drop by another 18 percent next year, as project economics look poor.  Without investment, new production will not materialize in the coming years, leading to further deterioration for the sector as existing fields age and decline.

Norway has its almost $1 trillion sovereign wealth fund to fall back on, so it is not as if its citizenry will be thrust into poverty anytime soon. Still, Norway may need to begin building a post-oil economy sooner than it thought.

Barry Eichengreen writes:  The European Central Bank is moving, hesitantly but ineluctably, toward quantitative easing. The threat of deflation – and the ineffectiveness of its previous measures – leaves it no choice. The question is whether the ECB will be able to move quickly enough.

The ECB has already attempted to ease credit conditions by purchasing high-quality asset-backed securities. It has bought securities backed by cash flows from private-sector mortgages, so-called covered bonds, and it has floated the idea of buying corporate bonds and multilateral securities issued by the European Investment Bank.

But it is clear that this will not be enough.  ECB President Draghi will need to continue working to build a consensus within the bank’s governing board for purchases of government bonds.

But Draghi and his colleagues will proceed in small steps, given fears in Germany that quantitative easing is just another name for runaway inflation. Initially, the ECB will buy a small volume of government bonds; when this fails to produce economic Armageddon, it will begin to scale up its purchases.

When deflationary expectations are entrenched,  consumers and investors delay spending on the ground that prices and costs will be lower tomorrow. Less spending means even less inflation and, in the worst case, falling prices.

Opponents of quantitative easing worry that it augurs inflation. The most influential objection to quantitative easing is that it will relieve the pressure on European governments to reform. According to this moral-hazard argument, the authorities will push ahead with painful labor- and product-market reforms and pursue the fiscal consolidation needed to gain the confidence of investors only if they remain under the gun. If the ECB purchases their bonds, governments will be able to ignore market pressure.

Under current conditions, with the inflation rate dangerously close to zero, governments are reluctant to do anything that increases the risk of deflation. And structural reform and fiscal consolidation are both deflationary in the short run.

Structural reform that increases the flexibility of labor and product markets is deflationary as well. Enhancing wage flexibility in an environment in which unemployment exceeds 11% will allow firms to cut wages, and lower labor costs will permit them to cut prices in an effort to gain market share. Deregulation that intensifies product-market competition will similarly lead to lower prices (that being what competition does).

Perhaps the best thing the ECB could do to encourage fiscal consolidation and structural reform is to banish the specter of deflation. Only full-bore quantitative easing can do that.

Jeffrey Frankel speculates:   Oil prices have plummeted 40% since June – good news for oil-importing countries, but bad news for Russia, Venezuela, Nigeria, and other oil exporters. Some attribute the price drop to the US shale-energy boom. Others cite OPEC’s failure to agree on supply restrictions.

But that is not the whole story. The price of iron ore is down, too. So are gold, silver, and platinum prices. And the same is true of sugar, cotton, and soybean prices. In fact, most dollar commodity prices have fallen since the first half of the year. Though a host of sector-specific factors affect the price of each commodity, the fact that the downswing is so broad suggests that macroeconomic factors are at work.

So, what macroeconomic factors could be driving down commodity prices?  The global economic slowdown, which has diminished demand for energy, minerals, and agricultural products may be a factor.  Indeed, growth has slowed and GDP forecasts have been revised downward since mid-year in most countries.

The United States is a major exception. The American expansion seems increasingly well established, with estimated annual growth exceeding 4% over the last two quarters.Yet it is particularly in the US that commodity prices have been falling. The Economist’s euro-denominated Commodity Price Index, for example, has actually risen over the last year; it is only the Index in terms of dollars – which is what gets all of the attention – that is down.

The importance of monetary policy as a determinant of commodity prices is often forgotten. Monetary tightening is widely anticipated in the US, with the Federal Reserve having ended quantitative easing in October and likely to raise short-term interest rates sometime in the coming year.

There is something intuitive about the idea that when the Fed “prints money,” the money flows into commodities, among other places, and so bids their prices up – and thus that prices fall when interest rates rise. But, what, exactly, is the causal mechanism?

In fact, there are four channels through which the real interest rate affects real commodity prices.  First, high interest rates reduce the price of storable commodities by increasing the incentive for extraction today rather than tomorrow, thereby boosting the pace at which oil is pumped, gold is mined, or forests are logged.

Second, high rates also decrease firms’ desire to carry inventories.

Third, portfolio managers respond to a rise in interest rates by shifting out of commodity contracts.

Finally, high interest rates strengthen the domestic currency, thereby reducing the price of internationally traded commodities in domestic terms.

US interest rates did not really rise in 2014, so most of these mechanisms are not yet directly at work. But speculators are thinking ahead and shifting out of commodities today in anticipation of future higher interest rates in 2015; the result has been to bring next year’s price decrease forward to today.

The prospect of US monetary tightening coincides with moves by the European Central Bank and the Bank of Japan toward enhanced monetary stimulus. The result has been an appreciation of the dollar against the euro and the yen. The euro is down 8% against the dollar since the first half of the year and the yen is down 14%. That explains how so many commodity prices can be down in terms of dollars and up in terms of other currencies.

Philip Pilkington writes:  Does the central bank control the long-term interest rate? Yes. Does it control the spread between the long-term rate and the short-term rate? There is no evidence to confirm this and the evidence that we do have — taking the Fed at its word — suggests that they do not. But regardless, next time some economists tells you that the markets control the long-term rate of interest you can safely tell them that they have absolutely no idea what they are talking about. Interest Rates and Central Bank

It’s somewhat understandable that few politicians want advocate for the massive spending it would take to update and maintain our existing infrastructure. It’s much easier to be a silent and foolish than loud and prudent. But if the United States fails to take advantage of current economic conditions to reinvest in infrastructure, it’s only going to have to inconvenience itself more in the future. See: the Washington DC Metro.