The Elephant in the Ground: Managing Oil and Sovereign Wealth

Frederick (Rick) van der Ploeg, Samuel Wills and ,

No 10188, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Oil exporters typically do not consider below-ground assets when allocating their sovereign wealth fund portfolios, and ignore above-ground assets when extracting oil. We present a unified framework for considering both. Subsoil oil should alter a fund?s portfolio through additional leverage and hedging. First-best spending should be a share of total wealth, and any unhedged volatility must be managed by precautionary savings. If oil prices are pro-cyclical, oil should be extracted faster than the Hotelling rule to generate a risk premium on oil wealth. We then discuss how the management of Norway?s fund can practically be improved with our analysis.

Keywords: Oil; Portfolio allocation; Sovereign wealth fund; Leverage; Hedging; Optimal extraction (search for similar items in EconPapers)
JEL-codes: E21 F65 G11 G15 O13 Q32 Q33 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-ene and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Elephant In The Ground: Managing Oil And Sovereign Wealth (2016)
Working Paper: The Elephant in the Ground: Managing Oil and Sovereign Wealth (2014)
Working Paper: THE ELEPHANT IN THE GROUND: MANAGING OIL AND SOVEREIGN WEALTH (2013)
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