Norway’s Oil Fund and fossil fuel divestment

This morning the AFR reported that the Norwegian Sovereign Wealth Fund (SWF) may divest its fossil fuel investments.

Some of Australia’s biggest resources companies could lose a major investor if Norway goes through with a plan to ban its oil-fuelled sovereign wealth fund from investing in fossil fuels including coal, gas and, ironically, oil.

Now it turns out that the broader environmental movement is running a divestment campaign against fossil fuels and will no doubt be lobbying the Norwegian authorities to divest from fossil fuels – although not to actually stop its own fossil fuel extraction activities. I think that it is significant that the environmental movement is targeting public listed firms but not state owned enterprise.

The Norwegian government is going to conduct a review as to whether it should hold investments in fossil fuels or whether it should ban those investments. As it stands the Norwegian government already bans investments in tobacco and armaments.

It seems to me that the issues are both economic and political. The economic issue to my mind is whether the Norwegian oil fund should hold investments in other fossil fuel producers at all. The fund exists to manage Norway’s oil wealth and to provide for some income if and when its own fossil fuels are exhausted. I am not convinced that a SWF is the best way to meet those objectives, but that is a matter for the Norwegians. But if the fund derives its funding from fossil fuel extraction, why would it then invest in other fossil fuel producers? If the SWF exists to diversify away from fossil fuels, then it is very likely to be over-weight in fossil fuels. Given its stated objectives there is a good economic argument for the Norwegian oil fund to be under-weight in fossil fuel investments. The problem I foresee is that if the Norwegian oil fund does decide to exit fossil fuel investment that it will describe that decision in environmental language and not in economic and risk-management language (assuming, of course, that there is an economic argument relating to portfolio risk and management to actually go under-weight in fossil fuels).

What about the political risks? Clearly the environmental movement isn’t lobbying the Norwegians to exit their own fossil fuel extraction activities. The argument then being that the Norwegian government can and should profit from its own mining activities but that other people (foreigners) shouldn’t. In the 1930s we saw countries raising tariffs against each other and restricting trade and prosperity. Economists at the time agreed it was a disastrous policy. It seems to me that this is a similar strategy. Foreign governments start directing their SWFs to engage in non-economic investment strategies that give rise to tit-for-tat retaliations.

Ultimately directing resources for non-economic reasons will lead to wealth destruction for both the Norwegians in the long run and the rest of us who are caught up in their decision making.

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40 Responses to Norway’s Oil Fund and fossil fuel divestment

  1. entropy

    Maybe the greenies are just lobbying for the world’s biggest example of irony which seemed like a good idea during a heavy duty weed smoking session, and the dour Scandinavians took them seriously.

  2. Infidel Tiger

    We have an airline and a cannery who need cash if they are going bonkers?

  3. 3d1k

    This is part of the environmental economic wreckers drive toward ‘stranded assets’. This must be resisted. Alas segments of the financial sector have already found a way to game this Eco-nihilism.

    If this gains ground we will face catastrophe, not of the environmental kind.

  4. johanna

    The economic issue to my mind is whether the Norwegian oil fund should hold investments in other fossil fuel producers at all. The fund exists to manage Norway’s oil wealth and to provide for some income if and when its own fossil fuels are exhausted. I am not convinced that a SWF is the best way to meet those objectives, but that is a matter for the Norwegians. But if the fund derives its funding from fossil fuel extraction, why would it then invest in other fossil fuel producers? If the SWF exists to diversify away from fossil fuels, then it is very likely to be over-weight in fossil fuels.

    Surely the aim of the SWF is to generate as much wealth as possible for Norway. Why would you exclude investing in fossil fuels, if that is the best investment decision?

    I don’t understand your point in the last quoted sentence. You seem to be saying that making profitable investments in the short to medium term in something that you want to get out of in the longer term is a bad thing. Seems like a non-sequitur to me.

  5. Sinclair Davidson

    The benefits of diversification revolve around correlation coefficients. If their source of funding is highly correlated with their investments then the fund will lose a lot of money if there is an adverse shock to fossil fuel stocks. Investigating that possibility would be up to the fund actuaries – it might be the case that the fund should still invest in other fossil fuels despite the exposure it already has.

  6. JC

    This is good for people that take a Warren Buffet approach to investing- value investing. If this sort of pressure expands return on equity because fewer funds are looking at fossil fuel type investments… well that’s good. There’s a better return for those of us who love fossil fuel companies believing they do God’s work on earth.

    The sheer hypocrisy of the Norwegians is breath taking.

  7. JC

    If their source of funding is highly correlated with their investments then the fund will lose a lot of money if there is an adverse shock to fossil fuel stocks. Investigating that possibility would be up to the fund actuaries – it might be the case that the fund should still invest in other fossil fuels despite the exposure it already has.

    Sinc, that’s true. However, as I see it the fund shouldn’t be that concerned source of their funds. They ought to be looking at investments which will maximize returns. Remember, the fund is investing money after the fuel/resource has been sold. I’m not sure the diversification angle would apply, no?

    I would imagine the fund is essentially replicating a variant of the Morgan Stanley Global Index Fund.

  8. Nanuestalker

    This must be Victorian sun-stroke … have you lost the plot Sinc?

  9. Nanuestalker

    This has to stop as you are going full-mOnty recently.

  10. Nanuestalker

    The benefits of diversification revolve around correlation coefficients.

    I rest my case!

  11. johanna

    Sorry, Sinc, I have no idea what a “correlation co-efficient” is. But I fail to see how the Fund buying well-performing shares in fossil fuel companies (which they can sell at any time) is a problem.

  12. .

    Some of Australia’s biggest resources companies could lose a major investor if Norway goes through with a plan to ban its oil-fuelled sovereign wealth fund from investing in fossil fuels including coal, gas and, ironically, oil.

    These leftists are sheer bullshit artists. They’re fucked when their wells dry up. It couldn’t happen sooner to a more hypocritical bunch of shills and cronies.

  13. Nanuestalker

    Sorry, Sinc, I have no idea what a “correlation co-efficient” is.

    Neither does he but he has his fist few lectures sorted! :)

  14. These people are dangerous…

    I dare say our Future Fund will be next, if it hasn’t already been purged of offending assets by the previous government…

  15. Oh come on

    If the SWF exists to diversify away from fossil fuels

    Does it, though? Perhaps it does. In that case, I guess it will eventually go the same way as Nauru’s SWF.

    That being said, I think some people are being a bit unfair to Sinc. Makes sense to me that the Norwegian SWF would want to have a disproportionate volume of non-fossil fuel investments to hedge against slumps in income they derive from fossil fuel extraction. However, this balance should be struck based on maximising value rather than kooky environmental/political concerns – which is what Sinc was suggesting.

  16. nerblnob

    Norway is similar to Australia in many ways: a resource-rich country whose younger inhabitants have dissociated themselves from what pays for their social welfare , conspicuous compassion, arty indulgences, extended holidays and leisure programs, and think they can bite the hand that feeds them while having their cake and eating it.

  17. nerblnob

    Although they do have a residual proddy work ethic that stops them all from being total wasters.

    That also sort of explains why Scandinavian social “solutions” only work in Scandinavia.

  18. johanna

    OK, so you are hedging against fossil fuels in any sensible fund by diversifying. But as I understand it, the Fund us quite separate from the oil revenue. I still can’t see the point here.

  19. Oh come on

    How could it be separate? It only exists because of the oil revenue.

  20. johanna

    That’s like saying that Al Gore’s wealth only exists because of tobacco and petrochemicals. Do keep up.

  21. nerblnob

    Money doesn’t know where it came from. If Norway’s oil/gas revenue declines, doesn’t mean oil/gas investments won’t do well elsewhere.

    In other good news, (old news if you’ve been paying attention) Statoil has invested in shale gas in NT and hydrocarbons deepwater GAB.

    A Norwegian perspective on NT’s Georgina shale (small pdf file)

  22. Blogstrop

    See, even level-headed Scandinavians can be bullshitted and duped by relentlessly proselytising leftist enviro-scum.

  23. Andysaurus

    Hi Sinc, You constantly confuse exit and exist. Is this finger trouble or your id’s existential angst struggling to escape under the radar of your ego? :) There is no escape my friend, you’re stuck there this side of madness! Fun isn’t it?

    [Fixed. Thanks. Sinc]

  24. eb

    Sinc , you’ve got “exist” everywhere you want “exit”.

  25. Tel

    I would think there’s logical reasons why no business wants to dump a lot of capital into accelerating production of goods that directly compete on the market with their own output. Given that oil is a commodity the more oil output, the lower the price.

    It might be logical for Norway to buy up existing production facilities in other countries snd then reduce domestic oil production (the price of oil will probably be higher in future).

  26. Tel

    Norway is similar to Australia in many ways: a resource-rich country whose younger inhabitants have dissociated themselves from what pays for their social welfare , conspicuous compassion, arty indulgences, extended holidays and leisure programs, and think they can bite the hand that feeds them while having their cake and eating it.

    If they can find decent investments outside oil then they can get away with it too, money is fungible and erases history. Mind you the second half of the Green Scam is getting those rich arty buggers into buying solar cells…

  27. tgs

    Capital market theory suggests that in order to maximize its return, the SWF should hold the market portfolio, or the closest approximation of it that it can.

    I think Sinc may have a point in that if the SWF is invested in fossil fuel equities that are also invested in the same Norwegian fossil fuel projects that its revenue is derived from then the SWF may be overweight equity in these projects relative to the market portfolio.

    However, I would suggest that divesting ALL fossil fuel stocks would move the SWF’s portfolio much further away from the ideal, hypothetical market portfolio than its current, potententially slightly overweight FF equity portfolio and would ultimately be a net negative to the fund and would likely result in reduced future performance.

  28. tgs
    The benefits of diversification revolve around correlation coefficients.

    I rest my case!

    Wow, so instead of conceding that you don’t know what Sinc is talking about (FYI it’s first year finance theory) you act like a porkchop and make yourself look stupid.

    You shouldn’t be proud of your ignorance.

  29. egg_

    See, even level-headed Scandinavians can be bullshitted and duped by relentlessly proselytising leftist enviro-scum.

    Scandos have always been uber Green; the Finns are the worst (and are net importers of Electricity from Sweden).

  30. Nanuestalker

    Sinc , you’ve got “exist” everywhere you want “exit”.

    It works if you read it with a SA accent. ;)

  31. Toiling Mass

    Banning investment in tobacco, armaments, and now oil?

    Norway should rename itself “No way”.

  32. stackja

    Norway gave the world the word Quisling, defined as a person who betrays his or her own country by aiding an invading enemy, often serving later in a puppet government; fifth columnist. The Green enemy and their allies deserve such a name as Quisling.

  33. wreckage

    I’m with JC. They should dump oil stocks fast and hard. And then I should buy them cheap.

  34. Oh come on

    That’s like saying that Al Gore’s wealth only exists because of tobacco and petrochemicals.

    Um, is it? No it isn’t. Do try not to be so confused.

  35. Oh come on

    Johanna, this is the second time you’ve cattily attempted to correct me for no apparent reason. And, assuming you wish to continue, it’s going to be the second time you look silly as a result of your misguided efforts. I don’t know why you’ve got a hard-on for me – I certainly haven’t said anything to you to provoke your poorly-aimed barbs. What gives?

  36. egg_

    wreckage
    #1213062, posted on March 5, 2014 at 12:45 pm

    +1
    (Bet the Dutch et al clean up).

  37. johanna

    OCM, if you are counting reprovals on the Cat, better get a spreadsheet happening – I’m hardly the only person who has taken issue with your comments. Dry your tears, baby.

    My point is about hypocrisy. Gore’s family wealth came from tobacco and petrochemicals. He proceeded to make a lot of money out of various kinds of “carbon futures.” Most recently, he sold his failing TV station to an oil-funded Middle East company for much more than it is worth.

    I have to admire Al’s financial acumen, which is prodigious, but the list of admirable attributes stops there.

    The Norwegians could learn a lot about making money from Al.

  38. tgs

    Having thought about it some more, I’m leaning towards the view that the source of funds for the SWF should be treated as exogenous to the investment returns on the fund and should not be taken into account when making investment decisions.

    The fund should attempt to hold the closest approximation to the market portfolio including investments in fossil fuel equities/projects.

  39. Tel

    The fund should attempt to hold the closest approximation to the market portfolio including investments in fossil fuel equities/projects.

    The point is that Norway as a whole automatically has a portfolio heavy in oil assets which includes the oil under the ground and whatever mining infrastructure they currently own. Therefore oil prices are built into the picture, no matter what. Logically the fund should be investing in something complimentary such as a trucking and delivery company.

  40. Oh come on

    Sure, but I’ve been here a while, so that’s not really surprising. Comes with the territory. However it’s almost always come as a result of an exchange gone sour, or from a leftist troll who’s been upset by something I’ve said that goes against some lefty shibboleh. But you have recently got your claws out on two separate occasions over trivialities that weren’t even addressed to you. It’s like you’re just waiting for an opportunity – any opportunity – to pounce. Which is a bit peculiar for me.

    Don’t worry, I’m not upset, as both attempts have been decidedly ill-conceived and this one is as easily swatted away as the first (I’ll go on to that in a minute if you like). So not upset, but I am curious…have I offended you at some point? If so, it was quite inadvertent.

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