The Elephant In The Ground: Managing Oil And Sovereign Wealth
Ton van den Bremer,
Frederick (Rick) van der Ploeg () and
Samuel Wills ()
European Economic Review, 2016, vol. 82, issue C, 113-131
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: Sovereign wealth fund; Leverage; Hedging; Oil extraction; Prudence (search for similar items in EconPapers)
JEL-codes: E21 F65 G11 G15 O13 Q32 Q33 (search for similar items in EconPapers)
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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)
Working Paper: THE ELEPHANT IN THE GROUND: MANAGING OIL AND SOVEREIGN WEALTH (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:82:y:2016:i:c:p:113-131
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