IDEAS home Printed from https://ideas.repec.org/p/oxf/oxcrwp/085.html
   My bibliography  Save this paper

Managing and Harnessing Volatile Oil Windfalls

Author

Listed:
  • Rick Van der Ploeg
  • Ton S. van den Bremer

Abstract

Three funds are necessary to manage an oil windfall: intergenerational, liquidity and investment funds. The optimal liquidity fund is bigger if the windfall lasts longer and oil price volatility, prudence and the GDP share of oil rents are high and productivity growth is low. We apply our theory to the windfalls of Norway, Iraq and Ghana. The optimal size of Ghana’s liquidity fund is tiny even with high prudence. Norway’s liquidity fund is bigger than Ghana’s. Iraq’s liquidity fund is colossal relative to its intergenerational fund. Only with capital scarcity, part of the windfall should be used for investing to invest. We illustrate how this can speed up the process of development in Ghana despite domestic absorption constraints.

Suggested Citation

  • Rick Van der Ploeg & Ton S. van den Bremer, 2012. "Managing and Harnessing Volatile Oil Windfalls," OxCarre Working Papers 085, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    • Handle: RePEc:oxf:oxcrwp:085
    as

    Download full text from publisher

    File URL: https://ora.ox.ac.uk/objects/uuid:8be90426-305d-4ace-be23-0b299ee7ae39
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Skander J. van den Heuvel, 2008. "Temporal risk aversion and asset prices," Finance and Economics Discussion Series 2008-37, Board of Governors of the Federal Reserve System (U.S.).
    2. Halvor Mehlum & Karl Moene & Ragnar Torvik, 2006. "Institutions and the Resource Curse," Economic Journal, Royal Economic Society, vol. 116(508), pages 1-20, January.
    3. van der Ploeg, Frederick, 2010. "Aggressive oil extraction and precautionary saving: Coping with volatility," Journal of Public Economics, Elsevier, vol. 94(5-6), pages 421-433, June.
    4. van der Ploeg, Frederick & Poelhekke, Steven, 2010. "The pungent smell of "red herrings": Subsoil assets, rents, volatility and the resource curse," Journal of Environmental Economics and Management, Elsevier, vol. 60(1), pages 44-55, July.
    5. Mark Aguiar & Manuel Amador & Gita Gopinath, 2009. "Investment Cycles and Sovereign Debt Overhang," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(1), pages 1-31.
    6. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2007. "Sources for financing domestic capital - Is foreign saving a viable option for developing countries?," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 682-702, September.
    7. Frederick van der Ploeg, 1993. "A Closed-form Solution for a Model of Precautionary Saving," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(2), pages 385-395.
    8. Frederick van der Ploeg & Anthony J. Venables, 2011. "Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies," Economic Journal, Royal Economic Society, vol. 121(551), pages 1-30, March.
    9. Lu, Yinqiu & Neftci, Salih, 2008. "Financial instruments to hedge commodity price risk for developing countries," Journal of Financial Transformation, Capco Institute, vol. 24, pages 137-143.
    10. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    11. Philippe Weil, 1993. "Precautionary Savings and the Permanent Income Hypothesis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(2), pages 367-383.
    12. Pindyck, Robert S, 1981. " The Optimal Production of an Exhaustible Resource When Price is Exogenous and Stochastic," Scandinavian Journal of Economics, Wiley Blackwell, vol. 83(2), pages 277-288.
    13. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    14. Mr. James Daniel, 2001. "Hedging Government Oil Price Risk," IMF Working Papers 2001/185, International Monetary Fund.
    15. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    16. Torfinn Harding & Frederick Ploeg, 2013. "Official forecasts and management of oil windfalls," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(5), pages 827-866, October.
    17. Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1484-1515.
    18. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    19. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 494-513, May.
    20. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 366-420, June.
    21. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    22. Frederick van der Ploeg & Anthony J. Venables, 2012. "Natural Resource Wealth: The Challenge of Managing a Windfall," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 315-337, July.
    23. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, vol. 89(2), pages 194-209, July.
    24. Frederick van der Ploeg & Steven Poelhekke, 2009. "Volatility and the natural resource curse," Oxford Economic Papers, Oxford University Press, vol. 61(4), pages 727-760, October.
    25. Gupta, Sanjeev & Kangur, Alvar & Papageorgiou, Chris & Wane, Abdoul, 2014. "Efficiency-Adjusted Public Capital and Growth," World Development, Elsevier, vol. 57(C), pages 164-178.
    26. Larson, Donald F. & Varangis, Panos & Yabuki, Nanae, 1998. "Commodity risk management and development," Policy Research Working Paper Series 1963, The World Bank.
    27. Hartwick, John M, 1977. "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," American Economic Review, American Economic Association, vol. 67(5), pages 972-974, December.
    28. Jerusalem D. Levhari & T. N. Srinivasan, 1969. "Optimal Savings under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(2), pages 153-163.
    29. Anne D. Boschini & Jan Pettersson & Jesper Roine, 2007. "Resource Curse or Not: A Question of Appropriability," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 593-617, September.
    30. Philippe Aghion & Peter Howitt, 2009. "The Economics of Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 9780262012638, December.
    31. Frederick Ploeg, 2012. "Bottlenecks in ramping up public investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 509-538, August.
    32. Era Dabla-Norris & Jim Brumby & Annette Kyobe & Zac Mills & Chris Papageorgiou, 2012. "Investing in public investment: an index of public investment efficiency," Journal of Economic Growth, Springer, vol. 17(3), pages 235-266, September.
    33. Mark Aguiar & Manuel Amador, 2011. "Growth in the Shadow of Expropriation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 651-697.
    34. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472, National Bureau of Economic Research, Inc.
    35. Borensztein, Eduardo & Jeanne, Olivier & Sandri, Damiano, 2013. "Macro-hedging for commodity exporters," Journal of Development Economics, Elsevier, vol. 101(C), pages 105-116.
    36. Rick Van der Ploeg & Steven Poelhekke, 2010. "The Pungent Smell of “Red Herrings’: Subsoil assets, rents, volatility and the resource curse," OxCarre Working Papers 033, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    37. Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 275-298.
    38. Antoine Bommier & Jean-Charles Rochet, 2006. "Risk Aversion and Planning Horizons," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 708-734, June.
    39. Luigi Ventura & Joseph Eisenhauer, 2006. "Prudence and precautionary saving," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 30(2), pages 155-168, June.
    40. Pedro R.D. Bom & Jenny E. Ligthart, 2009. "How Productive is Public Capital? A Meta-Regression Analysis," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0912, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    41. Paul Collier & Rick Van Der Ploeg & Michael Spence & Anthony J Venables, 2010. "Managing Resource Revenues in Developing Economies," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 84-118, April.
    42. John Hartwick, 1977. "Intergenerational Equity and the Investment of Rents from Exhaustible Resources in a Two Sector Model," Working Paper 281, Economics Department, Queen's University.
    43. Mr. Fabian Valencia, 2010. "Precautionary Reserves: An Application to Bolivia," IMF Working Papers 2010/054, International Monetary Fund.
    44. Pindyck, Robert S, 1980. "Uncertainty and Exhaustible Resource Markets," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1203-1225, December.
    45. Cherif, Reda & Hasanov, Fuad, 2011. "The volatility trap: why do big savers invest relatively little?," MPRA Paper 31286, University Library of Munich, Germany.
    46. Bems, Rudolfs & de Carvalho Filho, Irineu, 2011. "The current account and precautionary savings for exporters of exhaustible resources," Journal of International Economics, Elsevier, vol. 84(1), pages 48-64, May.
    47. repec:idb:brikps:72498 is not listed on IDEAS
    48. Agustin Roitman, 2011. "Precautionary Savings in a Small Open Economy Revisited," IMF Working Papers 2011/253, International Monetary Fund.
    49. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    50. Ahn, Chang Mo, 1989. " The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate," Journal of Finance, American Finance Association, vol. 44(5), pages 1411-1420, December.
    51. Blattman, Christopher & Hwang, Jason & Williamson, Jeffrey G., 2007. "Winners and losers in the commodity lottery: The impact of terms of trade growth and volatility in the Periphery 1870-1939," Journal of Development Economics, Elsevier, vol. 82(1), pages 156-179, January.
    52. Mr. Benedict F. W. Bingham & Mr. James Daniel & Mr. Giulio Federico, 2001. "Domestic Petroleum Price Smoothing in Developing and Transition Countries," IMF Working Papers 2001/075, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Samuel Wills, 2015. "Leave the Volatility Fund Alone: Principles for Managing Oil Wealth," OxCarre Working Papers 154, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    2. Samuel Wills, 2015. "Seven Principles for Managing Resource Wealth," Economics Series Working Papers OxCarre Research Paper 15, University of Oxford, Department of Economics.
    3. Wills, Samuel, 2018. "Leave the volatility fund alone: Principles for managing oil wealth," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 332-352.
    4. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 366-420, June.
    5. Frederick Ploeg, 2012. "Bottlenecks in ramping up public investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 509-538, August.
    6. Frederick van der Ploeg & Anthony J. Venables, 2012. "Natural Resource Wealth: The Challenge of Managing a Windfall," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 315-337, July.
    7. Stuart Landon and Constance Smith, 2015. "Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    8. van den Bremer, Ton & van der Ploeg, Frederick & Wills, Samuel, 2016. "The Elephant In The Ground: Managing Oil And Sovereign Wealth," European Economic Review, Elsevier, vol. 82(C), pages 113-131.
    9. Mahadeva Lavan, 2014. "Why does natural resource abundance not always lead to better outcomes? Limited financial development versus political impatience," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-37, January.
    10. van der Ploeg, Frederick, 2010. "Aggressive oil extraction and precautionary saving: Coping with volatility," Journal of Public Economics, Elsevier, vol. 94(5-6), pages 421-433, June.
    11. van den Bremer, Ton & van der Ploeg, Frederick & Wills, Samuel, 2016. "The Elephant In The Ground: Managing Oil And Sovereign Wealth," European Economic Review, Elsevier, vol. 82(C), pages 113-131.

    More about this item

    Keywords

    oil price volatility; sovereign wealth; intergenerational fund; liquidity fund; precautionary buffers; public investment; inefficiency; economic development; Norway; Iraq; Ghana;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:oxcrwp:085. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Melis Boya (email available below). General contact details of provider: https://edirc.repec.org/data/oxcaruk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.