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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 ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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)
Pages: 62 pages
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
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Downloads: (external link)
https://cama.crawford.anu.edu.au/sites/default/fil ... emer_ploeg_wills.pdf (application/pdf)

Related works:
Journal Article: The Elephant In The Ground: Managing Oil And Sovereign Wealth (2016) Downloads
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 (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2014-62

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