TY - JOUR
T1 - The Elephant In The Ground
T2 - Managing Oil And Sovereign Wealth
AU - van den Bremer, Ton
AU - van der Ploeg, Frederick
AU - Wills, Samuel
PY - 2016/2/1
Y1 - 2016/2/1
N2 - 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.
AB - 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.
KW - Hedging
KW - Leverage
KW - Oil extraction
KW - Prudence
KW - Sovereign wealth fund
UR - http://www.scopus.com/inward/record.url?scp=84949978873&partnerID=8YFLogxK
U2 - 10.1016/j.euroecorev.2015.10.005
DO - 10.1016/j.euroecorev.2015.10.005
M3 - Article
AN - SCOPUS:84949978873
SN - 0014-2921
VL - 82
SP - 113
EP - 131
JO - European Economic Review
JF - European Economic Review
ER -