The Elephant in The Ground: Managing Oil and Sovereign Wealth

T. van den Bremer, F. van der Ploeg, S. Wills

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)113-131
Number of pages18
JournalEuropean Economic Review
Volume82
Issue numberFebruary
DOIs
Publication statusPublished - 2016

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Oil
Wealth
Assets
Leverage
International finance
Sovereign wealth funds
Risk premium
Hedging
Norway
Resource economics
Exporters
Industry
Precautionary saving
Hotelling rule
Oil prices

Cite this

van den Bremer, T. ; van der Ploeg, F. ; Wills, S. / The Elephant in The Ground: Managing Oil and Sovereign Wealth. In: European Economic Review. 2016 ; Vol. 82, No. February. pp. 113-131.
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The Elephant in The Ground: Managing Oil and Sovereign Wealth. / van den Bremer, T.; van der Ploeg, F.; Wills, S.

In: European Economic Review, Vol. 82, No. February, 2016, p. 113-131.

Research output: Contribution to JournalArticleAcademicpeer-review

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