THE ELEPHANT IN THE GROUND: MANAGING OIL AND SOVEREIGN WEALTH

Frederick (Rick) van der Ploeg and Ton van den Bremer
Authors registered in the RePEc Author Service: Samuel Wills

No 129, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: One of the most important developments in international finance and resource economics in the past twenty years is the rapid and widespread emergence of the $6 trillion sovereign wealth fund industry. Oil exporters typically ignore below-ground assets when allocating these funds, and ignore above-ground assets when extracting oil. We present a unified stylized 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 unhedgeable 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. Finally, we discuss how our analysis could improve the management of Norway’s fund in practice.

Keywords: oil revenue; portfolio allocation; sovereign wealth fund; leverage; hedging; optimal extraction; prudence; risk aversion (search for similar items in EconPapers)
JEL-codes: E21 F65 G11 G15 O13 Q32 Q33 (search for similar items in EconPapers)
Date: 2013-12-31
New Economics Papers: this item is included in nep-ene and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (12)

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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 (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:129

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