Game Theory: SWFs and Cleantech

Ashby Monk

If you watched the US State of the Union Address last night, you no doubt remarked on the President’s interest in clean energy technology (cleantech). As I see it, the Obama Administration is interested in this developing market for three reasons: 1) It offers a way to create skilled jobs in the USA; 2) It fits with his environmental agenda; and 3) It is a way to achieve energy independence. Indeed, according to the White House:

“The President’s vision includes investments in important technologies to diversify our energy sources and reduce our dependence on foreign oil…”

Given that the Recovery Act allocated $80 billion to creating ‘clean energy jobs’, the US is quite obviously serious about this endeavor. I wonder what the commodity rich countries—those pesky sellers of foreign oil—think about this; how should they react to this ongoing push in America to stop buying their primary export? I think this topic could be a great subject for a game theory paper.

One option, which I highlighted a few months back, is for these resource rich countries to invest in clean tech themselves. As I said in a previous post:

“…I think cleantech would be a great investment for commodity based SWFs. Since sponsors of such funds typically rely on resources that will lose-out if the cleantech revolution succeeds, these investments would offer a very nice hedge over a long-term time horizon (~30 years). Indeed, getting in on the ground floor of cleantech would attenuate any loss of revenues associated with a technological advance that reduces our dependence on hydrocarbons.”

As such, it would be a great way to diversify the country’s long-term revenue stream. Interestingly, according to a Reuters article this morning, there are other reasons for SWFs to be interested:

“Since two-thirds of their wealth comes from oil and gas interests, the funds set up by nations from Norway to the Middle East and China would be burnishing their image by helping finance clean energy projects… Moving into more socially responsible areas is a way to diversify portfolios into alternative assets that can deliver returns uncorrelated to such traditional classes as stocks and bonds…”

Still, I can also think of some good reasons for these funds NOT to get involved as well. For example, if we are living in a capital starved world (which we have been), I can see how commodity SWFs would NOT want to provide their capital to a firm that would then work to end the world’s reliance on their country’s primary export! In fact, it may be that the cleantech firm will go out of business without the SWF’s investment. Of course, this only holds true if there are no other investors that would step in to take the SWF’s place, but it is something to consider.

In addition, SWFs are not in the business of giving out subsidies; they have a mandate to make a profit. So, for this industry to attract SWF investments, they need to show that they can generate returns. Ironically, in the short term, it may be state subsidies and regulations that help this industry turn a profit!

So there is a lot to consider. And since my brain hurts thinking about it, I leave this to the game theoreticians and their backward inductions…

1 Response to “Game Theory: SWFs and Cleantech”

  1. 1 Ashipa James Olashupo November 2, 2010 at 1:27 am

    Good advice,but being your claim that commodity producing nations are pesky hints of envy. If they are pesky, the owners of cleantech will also become pesky because it is natural to flaunt it.
    However, those countries should start a diversification of their economies indeed.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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