In this seminar Samuel Wills will provide an overview of his recent paper, “The Elephant in the Ground: Managing Oil and Sovereign Wealth”. Many oil exporters accumulate large sovereign wealth funds, though their portfolio allocation does not take into account below-ground assets, like oil. Similarly, the above-ground portfolio does not affect the decision to extract oil. In this paper, Dr Wills shows that subsoil oil wealth should change a country’s above-ground asset allocation in two ways. First, the holding of all risky assets is leveraged because there is additional wealth outside the fund. Second, more (less) is invested in financial assets that are negatively (positively) correlated with oil to hedge against the riskiness of subsoil exposure. Furthermore, if marginal oil rents move pro-cyclically with the value of the financial assets in the fund, then oil will be extracted faster than predicted by the standard Hotelling rule. This generates a risk premium for being exposed to volatile oil prices. Finally, Dr Wills suggests that any unhedged residual volatility must be managed through additional precautionary saving.

Samuel Wills holds an ESRC Future Research Leaders fellowship at Oxford University. His work in macroeconomics and finance focuses on how countries can best manage their natural resource wealth. He has consulted to the International Monetary Fund, the World Bank and the governments of Ghana, Iraq, Libya and Uganda on natural resource policy; and has previously worked for the Bank of England, Australia’s Department of Prime Minister and Cabinet and McKinsey and Co. He completed a DPhil in Economics at Oxford in 2014 and also holds an MPhil in Economics (Oxford) and a BCom in Actuarial Studies and Finance (Honours I and University Medal, UNSW).

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.