Israel to Avoid Dutch Disease with Sovereign Wealth Fund for Natural Gas Revenues

Tamar Natural Gas Field Israel

The global energy sector is abuzz about developments with the natural gas industry in Israel. The deepwater Tamar field, located in the Mediterranean, has been developed by Texas bases Noble energy and the Israeli Company, Delek Group. This huge gas find is Israel’s ticket to energy independence, but this doesn’t mean all is well for Israel’s export based economy.

Prior to the discovery of natural gas in the Mediterranean Sea, Israel relied on Egypt to import gas via a pipeline that ran though the Sinai Desert. While the energy deal with Egypt was never controversial on the Israeli side, it was very controversial in Egypt. When the Mubarak regime collapsed, the security situation in the Sinai deteriorated which resulted in multiple attacks on the pipeline carrying gas to Israel.

As an economically isolated country in its own region, energy independence has always been a top priority for the government. The cost of importing gas and oil to Israel has always been high. Now with the development of the Tamar filed and the continued good news surrounding the Leviathan field, Israel has estimated it will produce enough natural gas for 25 years of domestic consumption. Any gas produced or discovered in addition to the 25 year supply has been approved for export.

There is one sector of the economy, however, that has been negatively affected by the gas discovery. Because Israel will no longer be purchasing gas on the international market, it has less of a need for US dollars. This has caused a sharp appreciation in the Shekel which in turn has hurt Israeli exporters.

In order to combat the negative effects on the Israeli currency, the government has recently approved a Norway style sovereign wealth fund which will siphon income from natural gas into investments abroad. This is an excellent idea and a prudent use of funds from the natural gas. While some wanted to use the funds to boost social welfare or military spending, this would have hurt the export sector which is the main growth engine of Israel’s economy. The new Israeli sovereign wealth fund will help Israel avoid what economists call "Dutch Disease”, which occurred in the Netherlands after exports of gas and oil hurt traditional industries by making Dutch exports unaffordable with a sharp rise in the national currency.