Government Pension Fund Global´s investments in petroleum equities: a response to White Paper nr. 19

Abstract

As Norway possesses a large petroleum wealth, there has been calls for a change regarding the Government Pension Fund Global´s (GPFG´s) investments in petroleum equities based on diversification considerations. This subject has been debated by the Ministry of Finance in White Paper nr. 19, where the conclusion was not to alter the GPFG´s investment strategy as no long-term relationship between the oil price and oil and gas stocks was discovered. Evaluating the investment strategy based on oil price exclusively, and ignoring other factors that impact the inflow of petroleum revenues, has been criticized. The main objective of our thesis has been to uncover if there is a long-term relationship between the development in oil and gas stocks and the Norwegian state´s petroleum related income. If a long-term relationship exists, it could suggest a divestment in GPFG´s oil and gas investments to reduce Norway´s exposure to petroleum related shocks. In our thesis we present relevant research and theory, and illustrate the importance of the petroleum industry for the Norwegian economy. We have applied the Engle and Granger two-step error correction model to determine whether there exists a long-term relationship between oil and gas indexes and the petroleum related state income. Our results show a statistically significant long-term relationship between petroleum related state income and two global oil and gas indexes. When testing for the relationship between individual components of petroleum related state income and oil and gas indexes, our results vary. Our findings suggest that the stock price development of global integrated oil companies share the strongest long-term relationship with petroleum related state income. On this basis, and with regard to wider national wealth considerations, we conclude that the GPFG should consider a sale of its holdings in global integrated oil companies