Thursday, March 13, 2008

A new kind of oil hedge

Ask Diana Farrell and Susan Lund in this McKinsey quarterly report dissecting the motives of sovereign wealth funds -

“How will state investors behave as public shareholders or owners of companies in foreign markets? Will they seek to maximize value creation and long-term growth, or will their investments reflect the political objectives of their governments and the interests of businesses in their home countries? Financial markets require the free flow of information to function efficiently. The presence of huge, opaque players with non-economic motives could distort the pricing signals that other investors need...

…..Can higher oil prices really be good for the world economy? As we have seen, petrodollars are creating inflationary pressures in markets for illiquid investments, such as real estate, art and companies. If the pressures move beyond those markets, the potential asset price bubbles could burst. So far the world economy has accommodated higher oil prices without a notable rise in inflation or an economic slowdown, but this may change in the future.”

I see an indirect oil price hedging opportunity here for net importers. Create a vibrant, deep local financial market across asset classes, rich with intermediaries that optimally deploy the huge surpluses of SWF. Whatever they lose by incremental oil bill can be hedged by tax revenues from incremental fee income generated by local SWF managers. Oil importing nations after all, can’t keep paying fat import bills forever by printing currencies :)
Now I'm getting ideas. My daughter's been an avid painter ever since her junior school. I've archived some of those amateur works of art that look a lot better than a few of those auctioned for over a million $$ and probably bought by (who else?) SWF managers. Thinking of auctioning a few of them to help meet my fuel bills for the rest of my lifetime ;-)

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