TEL AVIV — Like a lottery-ticket buyer suddenly confronted with a jackpot, Israel must take special care not to squander the enormous potential return from its offshore natural-gas fields.
That’s the effective message from a report this week by the Milken Institute, which lays out how Israel might create a sovereign-wealth fund to manage the energy windfall.
“The sudden injection of vast revenue derived from natural-resource wealth, be it gold or oil or natural gas, has a long history of wreaking havoc in both developed and developing countries,” the report from the Santa Monica, Calif., economic think tank says.
Consortiums led by Noble Energy Inc. are developing huge acreage offshore northern Israel, with the finds potentially covering the country’s gas needs for decades while leaving enough for substantial exports.
The partners include a number of publicly traded companies, including Houston-based Noble NBL
+0.95% and the Israeli companies Avner,
AVOGF
+3.33%
IL:AVNR.L
-0.04%
Delek Drilling, IL:DEDR
-1.65% Isramco
ISRL
-1.25% and Ratio Oil Exploration LP.
IL:RATI.L
-0.30%
`Dutch Disease’
The report mentions the “Dutch Disease,” which followed the Netherlands’ 1959 discovery of oil and gas in the North Sea. The term, coined by the U.K. news magazine the Economist, refers to the aftermath of the huge revenue the nation took in.
The Dutch currency strengthened, which slammed the nation’s exporters by making their products more expensive overseas. In turn, imports became cheaper than locally made goods, domestic inflation soared and thousands of manufacturing workers lost their jobs, the report says.
And it points out similar scenarios elsewhere in the past few decades.
Applying that lesson to Israel, the report notes that the energy revenue could drive up the shekel, which would hammer Israel’s heavily tech-export-oriented economy.
The Bank of Israel has bought foreign currency to try to ease the shekel’s strength. “But future gas revenues will inevitably increase Israel’s foreign-exchange reserves, forcing” the shekel upward, the report says.
A sovereign-wealth fund, along the lines of those created in many countries and U.S. states with natural resources, can help solve the problem, the report says.
These wealth funds invest the revenue “in global markets rather than at home, targeting the returns for government expenditure and national development.”
Early this year Israel said it would consider forming such a fund, with the idea drawing backing from Prime Minister Benjamin Netanyahu and Bank of Israel Gov. Stanley Fischer.
The report suggests that the Israeli fund should set a main goal of building a reserve against damage from natural disaster (including the very real potential for a catastrophic earthquake), war and economic crisis. A secondary goal would be to provide revenue for pensions and health care for the country’s citizens.
And it calls on the government to take a number of immediate steps, including determining the fund’s level of risk; ensuring that the fund’s governance is free of political influence; enabling the fund to invest revenue from sources other than energy, like fiscal surpluses and foreign-exchange reserves; designing the investment strategy and defining the withdrawal and spending rules.
MarketWatch columnist Amotz Asa-El also notes that Israel has come through the global economic turmoil in relatively good shape.
But it now must resist calls from its defense minister and others for higher spending, lest it get caught in the trap in which Europe finds itself. Read Amotz Asa-El’s View From Jerusalem.
Around the Tel Aviv Stock Exchange
The Tel Aviv Stock Exchange’s TA-25 Index finished Thursday at 1,093.37, up 1.74%. That placed the benchmark up 2.1% for the week and down nearly 18% for the year to date.
The TA-100 Index finished the day at 988.07, up 1.13%. That pushed the index up 1.5% for the week and left it down 19% for the year to date.
Among the energy stocks on Thursday, Avner finished unchanged, Delek Drilling was off 1.7%, Isramco ticked up 0.2% and Ratio was off 0.3%.
The Bank of Israel set the representative rate for the shekel at 3.8 to the U.S. dollar on Thursday. That put the dollar up 0.8% against the shekel for the week and up 7.1% for 2011 to date. The shekel finished 2010 at 3.549 to the greenback.
marketwatch.com
That’s the effective message from a report this week by the Milken Institute, which lays out how Israel might create a sovereign-wealth fund to manage the energy windfall.
“The sudden injection of vast revenue derived from natural-resource wealth, be it gold or oil or natural gas, has a long history of wreaking havoc in both developed and developing countries,” the report from the Santa Monica, Calif., economic think tank says.
Consortiums led by Noble Energy Inc. are developing huge acreage offshore northern Israel, with the finds potentially covering the country’s gas needs for decades while leaving enough for substantial exports.
The partners include a number of publicly traded companies, including Houston-based Noble NBL
+0.95% and the Israeli companies Avner,
AVOGF
+3.33%
IL:AVNR.L
-0.04%
Delek Drilling, IL:DEDR
-1.65% Isramco
ISRL
-1.25% and Ratio Oil Exploration LP.
IL:RATI.L
-0.30%
`Dutch Disease’
The report mentions the “Dutch Disease,” which followed the Netherlands’ 1959 discovery of oil and gas in the North Sea. The term, coined by the U.K. news magazine the Economist, refers to the aftermath of the huge revenue the nation took in.
The Dutch currency strengthened, which slammed the nation’s exporters by making their products more expensive overseas. In turn, imports became cheaper than locally made goods, domestic inflation soared and thousands of manufacturing workers lost their jobs, the report says.
And it points out similar scenarios elsewhere in the past few decades.
Applying that lesson to Israel, the report notes that the energy revenue could drive up the shekel, which would hammer Israel’s heavily tech-export-oriented economy.
The Bank of Israel has bought foreign currency to try to ease the shekel’s strength. “But future gas revenues will inevitably increase Israel’s foreign-exchange reserves, forcing” the shekel upward, the report says.
A sovereign-wealth fund, along the lines of those created in many countries and U.S. states with natural resources, can help solve the problem, the report says.
These wealth funds invest the revenue “in global markets rather than at home, targeting the returns for government expenditure and national development.”
Early this year Israel said it would consider forming such a fund, with the idea drawing backing from Prime Minister Benjamin Netanyahu and Bank of Israel Gov. Stanley Fischer.
The report suggests that the Israeli fund should set a main goal of building a reserve against damage from natural disaster (including the very real potential for a catastrophic earthquake), war and economic crisis. A secondary goal would be to provide revenue for pensions and health care for the country’s citizens.
And it calls on the government to take a number of immediate steps, including determining the fund’s level of risk; ensuring that the fund’s governance is free of political influence; enabling the fund to invest revenue from sources other than energy, like fiscal surpluses and foreign-exchange reserves; designing the investment strategy and defining the withdrawal and spending rules.
MarketWatch columnist Amotz Asa-El also notes that Israel has come through the global economic turmoil in relatively good shape.
But it now must resist calls from its defense minister and others for higher spending, lest it get caught in the trap in which Europe finds itself. Read Amotz Asa-El’s View From Jerusalem.
Around the Tel Aviv Stock Exchange
The Tel Aviv Stock Exchange’s TA-25 Index finished Thursday at 1,093.37, up 1.74%. That placed the benchmark up 2.1% for the week and down nearly 18% for the year to date.
The TA-100 Index finished the day at 988.07, up 1.13%. That pushed the index up 1.5% for the week and left it down 19% for the year to date.
Among the energy stocks on Thursday, Avner finished unchanged, Delek Drilling was off 1.7%, Isramco ticked up 0.2% and Ratio was off 0.3%.
The Bank of Israel set the representative rate for the shekel at 3.8 to the U.S. dollar on Thursday. That put the dollar up 0.8% against the shekel for the week and up 7.1% for 2011 to date. The shekel finished 2010 at 3.549 to the greenback.
marketwatch.com
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