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The elephant in the ground: managing oil and sovereign wealth

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  • Ton van den Bremer
  • Frederick van der Ploeg
  • Samuel Wills

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.

Suggested Citation

  • Ton van den Bremer & Frederick van der Ploeg & Samuel Wills, 2014. "The elephant in the ground: managing oil and sovereign wealth," CAMA Working Papers 2014-62, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2014-62
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    Cited by:

    1. Anthony J. Venables & Samuel E. Wills, 2016. "Resource Funds: Stabilising, Parking, and Inter-generational Transfer," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 25(suppl_2), pages 20-40.
    2. van der Ploeg, Frederick, 2016. "Macro Policy Responses to Natural Resource Windfalls and the Crash in Commodity Prices," CEPR Discussion Papers 11520, C.E.P.R. Discussion Papers.
    3. Hjort, Ingrid, 2016. "Potential Climate Risks in Financial Markets: A Literature Overview," Memorandum 01/2016, Oslo University, Department of Economics.
    4. Frederick van der Ploeg & Anthony J. Venables, 2017. "Extractive revenues and government spending: Short- versus long-term considerations," WIDER Working Paper Series 045, World Institute for Development Economic Research (UNU-WIDER).
    5. van den Bremer, Ton S. & van der Ploeg, Frederick, 2016. "Saving Alberta's resource revenues: Role of intergenerational and liquidity funds," Energy Policy, Elsevier, vol. 99(C), pages 132-146.
    6. repec:eee:jebusi:v:91:y:2017:i:c:p:24-40 is not listed on IDEAS
    7. Mohn, Klaus, 2015. "Resource revenue management and wealth neutrality," UiS Working Papers in Economics and Finance 2015/2, University of Stavanger.

    More about this item

    Keywords

    oil; portfolio allocation; sovereign wealth fund; leverage; hedging; optimal extraction;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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