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
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 fundâ€™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 Norwayâ€™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)
New Economics Papers: this item is included in nep-ene and nep-mac
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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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