Wednesday, October 01, 2014

EVENT: EAGC 2014 | DMG | Hope Grant | Paid one month
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Israel Approves the Creation of a Sovereign Wealth Fund

The creation of a sovereign wealth fund in Israel was approved on Wednesday by the Knesset Science and Technology Committee. The bill included an additional detail stipulating that the special committee in charge with managing the fund’s budget will be led by the Knesset House Committee Chairman.

The creation of the sovereign wealth fund is essential to prevent the eventual negative repercussions of a substantial inflow of revenues from the sale of natural gas to export markets. The phenomenon is commonly known as ‘Dutch Disease’ and is one of the negative effects of an energy boom. The increase of wealth could cause a strengthening of the local currency - the Shekel - to the detriment of other industries that could lose in competitiveness.

A sovereign fund is an effective way to mitigate the risk. The inflow of cash is directed towards the fund and the money is invested in various sectors such as education, health and infrastructure. This fund management tool prevents inflation and releases the pressure on the domestic economy. Simultaneously, substantial efforts are usually invested in the lagging sectors to ensure their continuity and survival.

By planning ahead and approving the sovereign wealth fund, Israel’s policymakers have demonstrated an awareness of the risk and a their adoption of a holistic approach taking into consideration the infant energy industry and the Israeli economy as a whole. The sales of natural gas to export markets will generate billions of shekels to the Israeli economy and the monies need to be managed in a way that will benefit the country now and for generations to come.

Only in the fourth quarter of 2013 did Israel seal its decision to export approximately 40% of its natural gas resources. While monetizing its hydrocarbon resources and creating a considerable  inflow of cash that would fill the state’s coffers with billions of shekels was no doubt an important motive, encouraging investors to pursue exploration activities in Israel’s exclusive economic zone was nevertheless a paramount factor in the decision to export gas.

Israel’s export quota ensures that the country will still have enough natural gas to satisfy its domestic demand for decades to come. Years of energy dependence and vulnerability explain why most of the gas will be kept at home. The destination of Israel’s natural gas was also the object of months of speculations. European, East-Asian and regional markets were all possible guesses until Israel made it clear recently that it will commence by exporting its natural gas to immediate neighbors instead.

While a deal was sealed with the Palestinian Authority, a pipeline to Jordan is also currently being planned and is expected to reach completion by 2016 allowing the Hashemite Kingdom to import Israeli gas and put an end to a severe energy crisis caused by the disruption in the flow of natural gas from Egypt. Egypt is also a potential customer. Despite being a natural gas supplier to Jordan and Israel for years, Egypt is now suffering from its own shortfalls and could use Israeli gas.

Karen Ayat is an analyst focused on energy geopolitics in the Eastern Mediterranean.  Email Karen on ayat_karen@hotmail.com. Follow her on Twitter: @karenayat

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