Discussion paper

DP10188 The Elephant in the Ground: Managing Oil and Sovereign Wealth

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.

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Citation

van der Ploeg, F, S Wills and (eds) (2014), “DP10188 The Elephant in the Ground: Managing Oil and Sovereign Wealth”, CEPR Press Discussion Paper No. 10188. https://cepr.org/publications/dp10188