The Financial Value Added from Petroleum-Fund Mechanism

Abstract

In this thesis, we quantify the financial value added by reallocating petroleum revenues from oil reserves to the Government Pension Fund Global. By making a comparable scenario of a hypothetical oil reserve with lower extraction rate and no fund, we identified a value created from the risk reduction of investment diversification. The estimation of value added is sensitive to oil price volatility and investors’ level of risk aversion. In addition, we perform a portfolio optimization between the combination of investing in a fund and storing below ground. We find evidence of improvements in mean return, standard deviation and Sharpe ratio, compared to the current strategy of high extraction rate and investing all petroleum revenues in the Government Pension Fund Global.