Very high growth in demand for oil is one of the factors behind record high oil prices. In the first half of this year, the price of Brent Blend fluctuated for the most part between USD 45 and USD 55 per barrel. Oil prices have risen further this past summer, gradually reaching more than USD 60 per barrel. In the last few days, prices have been falling. Oil futures have also increased. Little excess production capacity in OPEC countries, combined with the prospect of lower production in non-OPEC countries, has probably influenced oil prices. At the same time, there are prospects of continued strong growth in demand in important oil-importing countries, such as China and a number of other emerging economies. Rising or persistently high oil prices may gradually dampen growth among our most important trading partners. The slowdown may occur gradually and will not necessarily be very pronounced, but there are now growing concerns that high oil prices may result in higher inflation and inflation expectations. High oil prices have a different impact in Norway than in oil-importing countries. A rise in oil prices improves our terms of trade. Other countries perceive this as an externally imposed tax. As a result of persistently high oil prices and expectations that oil prices will remain high, investment in the petroleum sector may reach record levels this year. The investment intentions survey for the petroleum sector points to very high growth. The scale and spillover effects of petroleum investment are highly uncertain.
2  BIS Review 13/2003  If we look at the period from 1986 and compare developments in nominal oil prices with the return on a fund managed according to the Petroleum Fund's investment strategy - a global portfolio containing bonds and equities in a 60-40 distribution - we see that the fund would have yielded a far higher annual return. What about the risk? How is it affected by a conversion from oil to financial wealth? History provides us with a clear, if somewhat surprising answer. A conversion from oil to financial wealth increases the return and at the same time reduces the risk. This is because wealth under the seabed (somewhat simplified) only consists of one asset, petroleum, while broadly invested financial wealth is highly diversified in many instruments whose return fluctuates at different rates. Today the distribution between financial wealth (the Petroleum Fund) and petroleum is about 20-80. If we venture to base our assessment on historical relationships, it is fairly clear that we have, relatively speaking, too much oil in our portfolio and that the current conversion to financial wealth is to our advantage. We have no guarantee, of course, that history will repeat itself, but relying on the opposite requires considerable courage. The Petroleum Fund can be invested in two main types of instruments; bonds and equities. The international bond market is about the same size as the equity market. Government bonds are a relatively safe investment, but the return is low.