Friday, June 20, 2008

Arabian Allocations

The great oil debate of 2008 can get pretty confusing at times. One of the reasons for this is that in their haste to blame the speculators, people forget to define speculation (witness Joe Lieberman and his attempt to draw the line between "speculation and excessive speculation"). If the Saudi royals decide to pump less oil because they don't won't to own the about-to-be-worth-less dollars that would result from selling it -- is it speculation? Oil producers now have huge SWF's and pumping oil has become a portfolio allocation decision:
But as oil producing nations have accumulated vast reserves of financial assets, switching from oil-in-the ground to stocks, bonds, or bank accounts is no longer so sure a bet. ... Central banks and sovereign wealth funds of oil-producing nations already hold hundreds of billions of dollars worth of Western financial assets. They might already have reached or exceeded what they view as an optimal allocation of their national wealth into these securities. Of course, producers are still not well diversified, and it's pretty clear that sovereign wealth funds are looking for alternative assets that might hedge their exposure both to oil and Western paper. But allocating into less liquid, unfamiliar categories of assets is slow work if you want to do it well. Perhaps current oil revenues outstrip oil producers' capacity to find good investment opportunities, and they view oil-in-the-ground as a better second-best asset than dollars in the bank.

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