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Communications on energy
Communications on energy Growth and overcapacity in the UK electricity industry In the face of a reduced growth rate in the demand for electricity, the UK seems to be committing itself to an excessive increase in generating capacity. This course of action, combined with the endemic overcapacity problem in the UK electricity industry over the last decade is likely to intensify the already strong institutional pressures for keeping electricity demand high. Raphael Papadopoulos considers the implicatlbns of the plans for expanded electricity supply.
The years immediately after the second world war saw rapid electrification of the economies of the industrial nations which, to a considerable extent, was associated with welcome modernization of an out-dated industrial structure. From the point of view of energy utilization efficiency, the effect was initially beneficial since electricity was replacing even less efficient coalburning equipment. The electrification of industry was followed, however, by a less w e l c o m e but no less spectacular - electricity advance into the heating sectors. Consequently, at some stage, the efficiency effect was reversed as the equipment to be replaced became more efficient and electricity was competing, particularly in the heating sectors, with versatile 38
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EEC
>,
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1960 62
I
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i
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64 66
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i
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70
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,
72
,
,
,
74
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Figure 1. Electricity consumption in the UK and EEC expressed as a percentage of total energy consumption, 1959-1974. E N E R G Y POLICY June 1981
and more efficient fuels in the form of oil and gas. In this respect electrification later became a contributory factor to a falling energy utilization efficiency which inflated the rate of growth of primary energy consumption in the 1960s and early 1970s.
and plant load factor, set in at the same time (Figures 2 and 3). ~ Electrification of the economy is an unrepeatable process. The extent to which it was more rapid in the U K was b o u n d to make it even more short-lived. The electricity advance into the heating sector was even more spectacular than that into the industrial sector.3 The statistical evidence suggested that, in spite of relatively falling fuel prices, electrification was levelling off, even before 1973, as the market was approaching saturation level. The average annual growth of electricity consumption in the U K fell from 7.5% for the first half of the period under consideration to 5.3% for the second half; corresponding figures for the E E C were 7.9% and 6 . 7 % . ' If these numbers show anything at all it is that the economy at the time of the 1973 energy crisis was nearer to saturation point in the U K than in the rest of the EEC. U n d e r these circumstances the effect which events post-1973 had on the energy indicators in general, and on electricity growth in particular, could hardly be more dramatic. If the UK's 32
EEC ~j2...O -'D /0-.0 "'or -
Growth
in electricity
~ 2s E
F o r historical reasons - related mainly to the existence of an older industrial structure and a more coal-based economy - the rate of electrification in the U K was considerably higher than in the rest of the EEC. Over the period 1959-73 the average annual growth in electricity consumption in the UK was 6.4% against a 2.0% growth in primary energy consumption; the corresponding figures for the EEC as a whole were 7.3% and 4 . 3 % . ' The difference is shown in Figure 1, where the primary energy equivalent of the electricity consumed is expressed as a percentage of total energy consumption, on a yearto-year basis, for the U K and the EEC. The 'take-off" point for electricity production in the U K was some time in the early 1960s. Further comparisons along the same lines show, however, that a marked deterioration in the UK industry's performance, from the point of view of overall thermal efficiency
26
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. . . . . . . . .
1960 62
£>4 66
,
8
,
, - ,
70 72
,
,
74
Figure 2. Overall efficiency of electricity production in the UK and EEC (including transmission losses and power station consumption), 1960-1974.
_ 46 *~ 4z ~- 4~ 28 4c 3~ 1960 62
64
66 68
70
72
74
Figure 3. Plant load factors in the UK and EEC, 1960-1974. 153
Communications
experience - by no means unique - is Yet, even after 1973, formidable anything to go by, the 'linear' relation- institutional pressures appeared to ship between energy consumption and direct energy planning - again more in economic growth - that cornerstone of the U K than elsewhere - towards the energy planning - sank without trace. idea of dismissing recent trends as a In the five years immediately before temporary peculiarity of the energy the 1973 crisis the average annual scerle. The 1978 Consultative growth in primary energy consumption Document on Energy Policy 7 is based in the UK was 2.2% against a 3% on a prediction of an average 2% annual growth in the G D P while elec- annual growth in primary energy contricity sales grew at an average annual sumption in the UK against a 3% rate of 4.7%. In the five years after, average growth in electricity sales over primary energy consumption shows an the next 25 years or so. The essence of average annual fall of 0.5% (calculated this prediction is that the energy on the basis of the slightly revised indicators established during the postfigures published by the D O E in 1980) war economic boom - including the against a 0.5% annual growth in the electrification p r o c e s s - are to hold well G D P , while electricity sales grew at an during a period punctuated by average annual rate of 0.4%. s economic recession, rapidly increasing fuel prices and sustained efforts towards energy conservation. To Overestimation crown this, the Document predicts a However, the momentum created by substantial increase in coal and gas the euphoria of the post-war years production in the UK over the same proved stronger than either logic or period, adding that, if nuclear power is statistics. The forecasts from the required to meet a substantially electricity industry - more in the U K increased share of our energy needs in than elsewhere - consistently overesti- future, the market for electricity will mated future demand for electricty by a have to grow. No thought seems to large margin. As a result, maximum have been given, however, as to how demand in England and Wales runs such an objective is to be pursued well behind net generating capacity 6 against the trends of the market and (Figure 4) and the picture is repeated in what its effect was to be on the UK the UK as a whole. Towards the end of government's own energy conservation 1973 the electricity generating system measures. The latter message is even in England and Wales had 46% over- more forcefully repeated in the current capacity in relation to net maximum plans for a rapid expansion of the demand, one of the largest ever nuclear sector. The government's objective is a 40 recorded anywhere in the industrial world. Understandably, the problem G W nuclear capacity in the UK by the spread over to the electrical construc- year 2000.8 This is tantamount to a 34 tion industry and particularly to the G W increase in nuclear generating capacity between 1978 and 2000. Even nuclear industry. if orders for new non-nuclear plant were to remain at present levels, 9 48 G W of non-nuclear capacity should be commissioned over the same period. 60]_ Net outputcapocity~ . ~ , ~ _ ~ A f t e r allowing for the plant which will normally be decommissioned by the 44~~ Moximurnderrx]ndreel year 2000, the net increase in ..O. C ' - - O ~ Z ) " "=J generating capacity, over the period 361~.~.y.~-o-~ under consideration, will be 44 GW. ~-~, . . . . . . . . . . . 1°366 68 70 72 74 76 780 Even if the present overcapacity problem is not taken into account, such an expansion corresponds to an average annual increase of 2.3% Figure 4. Maximum demand met and net generating capacity of CEGB between 1978 and 2000. l0 Such a figure is more than twice the average annual power stations, 1966-1978. ayear ending 31 March. increase in maximum demand since
I .f
154
1973 u and it is more than likely that it will exceed the growth of primary energy consumption over the period by a considerable margin. Such a prospect will inevitably lead the country down the road to further electrification under circumstances which make the wisdom of such a course highly questionable. The excessive increase in generating capacity will not make the institutional pressures for keeping the demand for electricity high any easier to deal with.
Gas v electricity It is likely that the UK will be forced to follow the only conceivable way in which such an objective can be pursued, eg that of reversing, in the face of the post-1973 realities and against strong market pressures, the present trend of gas replacing electricity in the heating sector. The cost of such a course of action will be very high, since it is unrealistic to suggest that electricity - nuclear or not - will ever be able to compete with gas for heating.
Nuclear economics The only economic case put forward so far - albeit a shaky one - for thermal reactor generated nuclear electricity was in comparison with fossil fuel generated electricity; the relevant cost estimates, as far as it is known, were based on a 2000 MW reactor, a 7% annual discount rate for the capital invested and a 7 years completion period. 12Yet the average size of second generation nuclear reactors is considerably smaller than 2 000 MW, the annual discount rate considerably higher than 7% and the completion period eleven years at the best. Costs in the case of the four A G R s are, so far, more than three times higher than original estimates. 13 Besides, the rapid expansion of nuclear generating capacity will not leave enough baseload to accommodate all the nuclear stations, let alone the non-nuclear ones. This will necessitate a reduction in the order of merit of the non-nuclear stations at a very early stage in their life, so increasing the industry's operational costs.
E N E R G Y POLICY June 1981
Communications One cannot help feeling that the 'Energy Conservation in the United m a j o r question which a review of Kingdom, HMSO, London, 1974. "OECD, op cit, Ref 1. recent and likely future energy SEnergyTrends, monthly statistical bulletin, developments in the U K poses, is this: Department of Energy, London. why should the market for electricity - 6Statistical Yearbook 1977-78, CEGB, in the U K of all places - have to grow, London, 1978. 7Energy Policy, Cmnd 7101, HMSO, how, and at what cost to the country? London, 1979. 8National Energy Policy, Energy Paper 41, Raphael Papadopoulos HMSO, London, 1979. ~CEGB, op cit, Ref 6. Polytechnic of the South Bank '°An answer to this paradox could perhaps London, UK be found in recent reports of a massive premature retirement of conventional generating plant in the very near future. HCEGB, op c#, Ref 6. 'OECD, Statistics on Energy 1959-1973, '2Coal and Nuclear Power Station Costs, OECD, Paris, 1974. Energy Commission Paper No 6, Depart20ECD, Energy Balances in OECD ment of Energy, London, 1978. Countries 1960-1974, OECD, Pads, 1975. '3The Times, 23 January 1980.
Norwegian oil revenue- its use and misuse Norway's revenues from North Sea oil and gas have become very substantial In
the latter part of the 1980s, the government take is likely to be in the range 60-100 billion kroner per year (1980 prices). Lars Thulin argues that this is not only a challenge but also a threat to the Norwegian economy and suggests policies for optimal use of these revenues.
Norway has a long history as a capital importer. Since the Napoleonic wars, it has imported capital every year but one, and its total foreign debt is more than 100 billion Norwegian kroner.' A few years ago this debt was of concern to many Norwegians and there has been heated debate as to whether the creditworthiness of the country would suffer from the huge accumulation of foreign debt. Today the situation is very different and the size of the foreign debt is no longer of real concern to the Norwegian community. The build-up of oil and gas production, together with the increases in oil and gas prices, have substantially accelerated Norway's income from the petroleum sector. In 1980 this production was about 50 million tonnes of oil equivalent, with a value of about 50 billion kroner. Oil and gas exports accounted for about 33% of total exports value in 1980. The value of oil and gas production will be about the same as the total contribution from the
ENERGY
P O L I C Y June 1981
Norwegian onshore industry. These figures give a rough idea of the importance of the oil and gas sector in the Norwegian economy. A substantial part of production value from the North Sea goes to the Norwegian government in the form of royalties, taxes and special taxes. In 1980 the government take from oil and gas activities offshore was more than 25 billion kroner. Den norske Creditbank have calculated that the total government take will increase during this decade up to about 50 billion kroner per year in the late 1980s (these figures represent fixed value 1980 kroner and adding the effect of inflation, they will be even bigger). The figures referred to are based on production from oil and gas fields that are developed or under development. In the latter part of the 1980s new fields will probably come on stream, and production will increase. W h a t level this will reach is difficult to forecast at present, but it is safe to predict that income to the Norwegian
government in the form of royalties and taxes will be very substantial, in the estimated range 60-100 billion kroner (1980 kroner). This situation is an enormous challenge and at the same time a threat to the Norwegian economy.
Norway's problem The Norwegian economy will not be able to digest an input of extra capital at the level mentioned. Norwegian industry already suffers from increased costs which make it difficult for it to compete on the home and export markets. This tendency, which needs to be counteracted, will be even more m a r k e d if the extra income from the petroleum sector is spent within the Norwegian onshore economy. If the extra income is spent in this way, it will not turn out to be extra income but will displace onshore income and the net result will tend to zero. The competitiveness of Norwegian industry will be weakened and the domestic market share will decrease - thereby increasing imports. On the external markets, this reduced competitiveness would reduce exports. Fortunately, this theory is understood by the ministries responsible including the Ministry of Finance, by the Central Bank and by many in the banking and industrial communities. This understanding will also gradually penetrate to the Norwegian public, so that Norway will benefit from her traditional puritanism and thriftiness.
Alternative uses To gain popular support for a policy of not using petroleum income within Norway's own economy, we need to suggest an attractive alternative use for it. A t the same time the extreme 'conservation' attitude which argues that the petroleum resources should be left in the ground and that production should be limited as much as possible must be avoided. Norwegian petroleum resources should certainly be used in such a way that society will derive maximum benefit. Norway controls a surplus of petroleum, which is, for most of the western countries, a critically scarce commodity. If the
155
The years immediately after the second world war saw rapid electrification of the economies of the industrial nations which, to a considerable extent, was associated with welcome modernization of an out-dated industrial structure. From the point of view of energy utilization efficiency, the effect was initially beneficial since electricity was replacing even less efficient coalburning equipment. The electrification of industry was followed, however, by a less w e l c o m e but no less spectacular - electricity advance into the heating sectors. Consequently, at some stage, the efficiency effect was reversed as the equipment to be replaced became more efficient and electricity was competing, particularly in the heating sectors, with versatile 38
:5O
"°'~-"~
0
o 26
EEC
>,
I
I
i
L
1960 62
I
i
i
i
64 66
i
i
68
i
,
70
,
,
72
,
,
,
74
/
Figure 1. Electricity consumption in the UK and EEC expressed as a percentage of total energy consumption, 1959-1974. E N E R G Y POLICY June 1981
and more efficient fuels in the form of oil and gas. In this respect electrification later became a contributory factor to a falling energy utilization efficiency which inflated the rate of growth of primary energy consumption in the 1960s and early 1970s.
and plant load factor, set in at the same time (Figures 2 and 3). ~ Electrification of the economy is an unrepeatable process. The extent to which it was more rapid in the U K was b o u n d to make it even more short-lived. The electricity advance into the heating sector was even more spectacular than that into the industrial sector.3 The statistical evidence suggested that, in spite of relatively falling fuel prices, electrification was levelling off, even before 1973, as the market was approaching saturation level. The average annual growth of electricity consumption in the U K fell from 7.5% for the first half of the period under consideration to 5.3% for the second half; corresponding figures for the E E C were 7.9% and 6 . 7 % . ' If these numbers show anything at all it is that the economy at the time of the 1973 energy crisis was nearer to saturation point in the U K than in the rest of the EEC. U n d e r these circumstances the effect which events post-1973 had on the energy indicators in general, and on electricity growth in particular, could hardly be more dramatic. If the UK's 32
EEC ~j2...O -'D /0-.0 "'or -
Growth
in electricity
~ 2s E
F o r historical reasons - related mainly to the existence of an older industrial structure and a more coal-based economy - the rate of electrification in the U K was considerably higher than in the rest of the EEC. Over the period 1959-73 the average annual growth in electricity consumption in the UK was 6.4% against a 2.0% growth in primary energy consumption; the corresponding figures for the EEC as a whole were 7.3% and 4 . 3 % . ' The difference is shown in Figure 1, where the primary energy equivalent of the electricity consumed is expressed as a percentage of total energy consumption, on a yearto-year basis, for the U K and the EEC. The 'take-off" point for electricity production in the U K was some time in the early 1960s. Further comparisons along the same lines show, however, that a marked deterioration in the UK industry's performance, from the point of view of overall thermal efficiency
26
"' za 22
O" ~
. . . . . . . . .
1960 62
£>4 66
,
8
,
, - ,
70 72
,
,
74
Figure 2. Overall efficiency of electricity production in the UK and EEC (including transmission losses and power station consumption), 1960-1974.
_ 46 *~ 4z ~- 4~ 28 4c 3~ 1960 62
64
66 68
70
72
74
Figure 3. Plant load factors in the UK and EEC, 1960-1974. 153
Communications
experience - by no means unique - is Yet, even after 1973, formidable anything to go by, the 'linear' relation- institutional pressures appeared to ship between energy consumption and direct energy planning - again more in economic growth - that cornerstone of the U K than elsewhere - towards the energy planning - sank without trace. idea of dismissing recent trends as a In the five years immediately before temporary peculiarity of the energy the 1973 crisis the average annual scerle. The 1978 Consultative growth in primary energy consumption Document on Energy Policy 7 is based in the UK was 2.2% against a 3% on a prediction of an average 2% annual growth in the G D P while elec- annual growth in primary energy contricity sales grew at an average annual sumption in the UK against a 3% rate of 4.7%. In the five years after, average growth in electricity sales over primary energy consumption shows an the next 25 years or so. The essence of average annual fall of 0.5% (calculated this prediction is that the energy on the basis of the slightly revised indicators established during the postfigures published by the D O E in 1980) war economic boom - including the against a 0.5% annual growth in the electrification p r o c e s s - are to hold well G D P , while electricity sales grew at an during a period punctuated by average annual rate of 0.4%. s economic recession, rapidly increasing fuel prices and sustained efforts towards energy conservation. To Overestimation crown this, the Document predicts a However, the momentum created by substantial increase in coal and gas the euphoria of the post-war years production in the UK over the same proved stronger than either logic or period, adding that, if nuclear power is statistics. The forecasts from the required to meet a substantially electricity industry - more in the U K increased share of our energy needs in than elsewhere - consistently overesti- future, the market for electricity will mated future demand for electricty by a have to grow. No thought seems to large margin. As a result, maximum have been given, however, as to how demand in England and Wales runs such an objective is to be pursued well behind net generating capacity 6 against the trends of the market and (Figure 4) and the picture is repeated in what its effect was to be on the UK the UK as a whole. Towards the end of government's own energy conservation 1973 the electricity generating system measures. The latter message is even in England and Wales had 46% over- more forcefully repeated in the current capacity in relation to net maximum plans for a rapid expansion of the demand, one of the largest ever nuclear sector. The government's objective is a 40 recorded anywhere in the industrial world. Understandably, the problem G W nuclear capacity in the UK by the spread over to the electrical construc- year 2000.8 This is tantamount to a 34 tion industry and particularly to the G W increase in nuclear generating capacity between 1978 and 2000. Even nuclear industry. if orders for new non-nuclear plant were to remain at present levels, 9 48 G W of non-nuclear capacity should be commissioned over the same period. 60]_ Net outputcapocity~ . ~ , ~ _ ~ A f t e r allowing for the plant which will normally be decommissioned by the 44~~ Moximurnderrx]ndreel year 2000, the net increase in ..O. C ' - - O ~ Z ) " "=J generating capacity, over the period 361~.~.y.~-o-~ under consideration, will be 44 GW. ~-~, . . . . . . . . . . . 1°366 68 70 72 74 76 780 Even if the present overcapacity problem is not taken into account, such an expansion corresponds to an average annual increase of 2.3% Figure 4. Maximum demand met and net generating capacity of CEGB between 1978 and 2000. l0 Such a figure is more than twice the average annual power stations, 1966-1978. ayear ending 31 March. increase in maximum demand since
I .f
154
1973 u and it is more than likely that it will exceed the growth of primary energy consumption over the period by a considerable margin. Such a prospect will inevitably lead the country down the road to further electrification under circumstances which make the wisdom of such a course highly questionable. The excessive increase in generating capacity will not make the institutional pressures for keeping the demand for electricity high any easier to deal with.
Gas v electricity It is likely that the UK will be forced to follow the only conceivable way in which such an objective can be pursued, eg that of reversing, in the face of the post-1973 realities and against strong market pressures, the present trend of gas replacing electricity in the heating sector. The cost of such a course of action will be very high, since it is unrealistic to suggest that electricity - nuclear or not - will ever be able to compete with gas for heating.
Nuclear economics The only economic case put forward so far - albeit a shaky one - for thermal reactor generated nuclear electricity was in comparison with fossil fuel generated electricity; the relevant cost estimates, as far as it is known, were based on a 2000 MW reactor, a 7% annual discount rate for the capital invested and a 7 years completion period. 12Yet the average size of second generation nuclear reactors is considerably smaller than 2 000 MW, the annual discount rate considerably higher than 7% and the completion period eleven years at the best. Costs in the case of the four A G R s are, so far, more than three times higher than original estimates. 13 Besides, the rapid expansion of nuclear generating capacity will not leave enough baseload to accommodate all the nuclear stations, let alone the non-nuclear ones. This will necessitate a reduction in the order of merit of the non-nuclear stations at a very early stage in their life, so increasing the industry's operational costs.
E N E R G Y POLICY June 1981
Communications One cannot help feeling that the 'Energy Conservation in the United m a j o r question which a review of Kingdom, HMSO, London, 1974. "OECD, op cit, Ref 1. recent and likely future energy SEnergyTrends, monthly statistical bulletin, developments in the U K poses, is this: Department of Energy, London. why should the market for electricity - 6Statistical Yearbook 1977-78, CEGB, in the U K of all places - have to grow, London, 1978. 7Energy Policy, Cmnd 7101, HMSO, how, and at what cost to the country? London, 1979. 8National Energy Policy, Energy Paper 41, Raphael Papadopoulos HMSO, London, 1979. ~CEGB, op cit, Ref 6. Polytechnic of the South Bank '°An answer to this paradox could perhaps London, UK be found in recent reports of a massive premature retirement of conventional generating plant in the very near future. HCEGB, op c#, Ref 6. 'OECD, Statistics on Energy 1959-1973, '2Coal and Nuclear Power Station Costs, OECD, Paris, 1974. Energy Commission Paper No 6, Depart20ECD, Energy Balances in OECD ment of Energy, London, 1978. Countries 1960-1974, OECD, Pads, 1975. '3The Times, 23 January 1980.
Norwegian oil revenue- its use and misuse Norway's revenues from North Sea oil and gas have become very substantial In
the latter part of the 1980s, the government take is likely to be in the range 60-100 billion kroner per year (1980 prices). Lars Thulin argues that this is not only a challenge but also a threat to the Norwegian economy and suggests policies for optimal use of these revenues.
Norway has a long history as a capital importer. Since the Napoleonic wars, it has imported capital every year but one, and its total foreign debt is more than 100 billion Norwegian kroner.' A few years ago this debt was of concern to many Norwegians and there has been heated debate as to whether the creditworthiness of the country would suffer from the huge accumulation of foreign debt. Today the situation is very different and the size of the foreign debt is no longer of real concern to the Norwegian community. The build-up of oil and gas production, together with the increases in oil and gas prices, have substantially accelerated Norway's income from the petroleum sector. In 1980 this production was about 50 million tonnes of oil equivalent, with a value of about 50 billion kroner. Oil and gas exports accounted for about 33% of total exports value in 1980. The value of oil and gas production will be about the same as the total contribution from the
ENERGY
P O L I C Y June 1981
Norwegian onshore industry. These figures give a rough idea of the importance of the oil and gas sector in the Norwegian economy. A substantial part of production value from the North Sea goes to the Norwegian government in the form of royalties, taxes and special taxes. In 1980 the government take from oil and gas activities offshore was more than 25 billion kroner. Den norske Creditbank have calculated that the total government take will increase during this decade up to about 50 billion kroner per year in the late 1980s (these figures represent fixed value 1980 kroner and adding the effect of inflation, they will be even bigger). The figures referred to are based on production from oil and gas fields that are developed or under development. In the latter part of the 1980s new fields will probably come on stream, and production will increase. W h a t level this will reach is difficult to forecast at present, but it is safe to predict that income to the Norwegian
government in the form of royalties and taxes will be very substantial, in the estimated range 60-100 billion kroner (1980 kroner). This situation is an enormous challenge and at the same time a threat to the Norwegian economy.
Norway's problem The Norwegian economy will not be able to digest an input of extra capital at the level mentioned. Norwegian industry already suffers from increased costs which make it difficult for it to compete on the home and export markets. This tendency, which needs to be counteracted, will be even more m a r k e d if the extra income from the petroleum sector is spent within the Norwegian onshore economy. If the extra income is spent in this way, it will not turn out to be extra income but will displace onshore income and the net result will tend to zero. The competitiveness of Norwegian industry will be weakened and the domestic market share will decrease - thereby increasing imports. On the external markets, this reduced competitiveness would reduce exports. Fortunately, this theory is understood by the ministries responsible including the Ministry of Finance, by the Central Bank and by many in the banking and industrial communities. This understanding will also gradually penetrate to the Norwegian public, so that Norway will benefit from her traditional puritanism and thriftiness.
Alternative uses To gain popular support for a policy of not using petroleum income within Norway's own economy, we need to suggest an attractive alternative use for it. A t the same time the extreme 'conservation' attitude which argues that the petroleum resources should be left in the ground and that production should be limited as much as possible must be avoided. Norwegian petroleum resources should certainly be used in such a way that society will derive maximum benefit. Norway controls a surplus of petroleum, which is, for most of the western countries, a critically scarce commodity. If the
155