The Elephant in The Ground: Managing Oil and Sovereign Wealth

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

doi:10.1016/j.euroecorev.2015.10.005

The Elephant in The Ground: Managing Oil and Sovereign Wealth

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

Spatial Economics

Research output: Contribution to Journal › Article › Academic › peer-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 language	English
Pages (from-to)	113-131
Number of pages	18
Journal	European Economic Review
Volume	82
Issue number	February
DOIs	https://doi.org/10.1016/j.euroecorev.2015.10.005
Publication status	Published - 2016

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10.1016/j.euroecorev.2015.10.005

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Cite this

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title = "The Elephant in The Ground: Managing Oil and Sovereign Wealth",

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.",

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