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van den Bremer, T., van der Ploeg, F., and Wills, S. (2016). The elephant in the ground: Managing oil and sovereign wealth. European Economic Review, 82(February):113-131.


  • Journal
    European Economic Review

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.