The Elephant in the Ground: Managing Oil and Sovereign Wealth

Van Den Bremer, Ton; van der Ploeg, Rick; Wills, Samuel

doi:10.2139/ssrn.2509620

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The Elephant in the Ground: Managing Oil and Sovereign Wealth

CAMA Working Paper No. 62/2014

62 Pages Posted: 14 Oct 2014 Last revised: 16 Oct 2014

See all articles by Ton Van Den Bremer

Samuel Wills

University of Oxford

There are 2 versions of this paper

Date Written: October 1, 2014

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.

Keywords: oil, portfolio allocation, sovereign wealth fund, leverage, hedging, optimal extraction

JEL Classification: E21, F65, G11, G15, O13, Q32, Q33

Suggested Citation: Suggested Citation

Van Den Bremer, Ton and van der Ploeg, Frederick and Wills, Samuel, The Elephant in the Ground: Managing Oil and Sovereign Wealth (October 1, 2014). CAMA Working Paper No. 62/2014, Available at SSRN: https://ssrn.com/abstract=2509620 or http://dx.doi.org/10.2139/ssrn.2509620