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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

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: 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)
Date: 2016
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Working Paper: The Elephant in the Ground: Managing Oil and Sovereign Wealth (2014) Downloads
Working Paper: The elephant in the ground: managing oil and sovereign wealth (2014) Downloads
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DOI: 10.1016/j.euroecorev.2015.10.005

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