World's biggest wealth fund has peaked as oil sinks, Norway says

[OSLO] The world's largest sovereign wealth fund has reached its peak amid a collapse in oil prices, according to the governor of Norway's central bank.

The development means western Europe's biggest crude producer needs to get used to lower revenue from its petroleum industry, Governor Oeystein Olsen said in the text of a speech delivered in Oslo on Thursday.

"At an oil price of around US$60 per barrel, transfers to" the wealth fund "may come to a halt," he said. As head of the central bank, Olsen oversees Norway's US$860 billion Government Pension Fund Global.

Norwegian governments are allowed to use as much as 4 percent of the fund to plug budget deficits. As recently as October, Norway estimated the fund would reach 7.28 trillion kroner (US$945 billion) by 2020. But a 50 per cent plunge in the price of Brent crude since a June peak has undermined those growth assumptions as the country's main source of income gets pummeled by a supply glut.

The fund, into which Norway channels most of its oil wealth to avoid overheating the economy, has had an average real return of 3.8 per cent, according to the central bank. The government should now be "prepared for the possibility that it will be lower, perhaps below 3 per cent," Mr Olsen said.

The ruling coalition is planning to spend a record 164 billion kroner of its oil revenue this year and has promised more stimulus should the economy need it.

The government's krone income, which it gets from taxes on crude production and dividends from Statoil ASA, is no longer big enough to cover budget needs. That's forced the central bank to eat into currency reserves to make up the difference.

With oil revenue declining, "we are approaching the point where government spending of petroleum revenues will exceed the revenues deriving from the petroleum sector," Mr Olsen said.

The central bank started buying kroner for the first time in October to cover growing budget needs as crude output falls. The bank has since said it needed to increase daily purchases to 700 million kroner in February, from 500 million kroner in January.

"At today's level of petroleum revenue spending there will soon be a need to make transfers" from the fund "to the fiscal budget," Mr Olsen said. At today's oil price, transfers to the wealth fund "will quickly fall towards zero, soon leading to a situation where its currency income is limited to interest and dividend income. Next year, it may be necessary to spend some of the return to cover the non-oil budget deficit."

BLOOMBERG