The Elephant in the Ground, Oil Extraction and Asset Allocation in Sovereign Wealth Funds

Early Career Researcher Seminar


Most oil exporters have a large share of their national wealth beneath the ground. Many of these countries also establish sovereign wealth funds with the proceeds from oil extraction. However, the decisions of when to extract oil and what assets to hold are usually disconnected. In this paper we ask the question, how should subsoil oil change a country’s asset allocation above the ground? We show that oil rich countries should offset their subsoil exposure, leading to a wealth and a substitution effect on their asset allocation above the ground. Extraction will be slower than the standard Hotelling rule on average if oil prices are pro-cyclical, because of a portfolio effect. This leaves oil to be extracted when oil prices and asset returns are high. Consumption will manage any residual volatility through precautionary savings.


Sam Wills (Oxford)

Monday, November 25, 2013 - 12:30
to 13:00