The Elephant in the Ground: Managing Oil and Sovereign Wealth

63 Pages Posted: 6 Oct 2014

See all articles by Ton Van Den Bremer

Ton Van Den Bremer

University of Oxford

Rick van der Ploeg

University of Oxford

Samuel Wills

University of Oxford

Multiple version iconThere are 2 versions of this paper

Date Written: October 2014


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

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

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 2014). CEPR Discussion Paper No. DP10188, Available at SSRN:

Ton Van Den Bremer (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Frederick Van der Ploeg

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Samuel Wills

University of Oxford ( email )

Department of Economics
Manor Road Building,Manor Road
Oxford, OX1 3UQ
United Kingdom


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