impact of high oil prices on african economies

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Impact of High Oil Priceson African Economies

This chapter reviews evidence of the economic andsocio-environmental effects of high and rising oil priceson African countries. In the past, significant increasesin the price of oil have led to worldwide economicrecessions, such as the 1973 and 1979 energy crises. Inmany European countries, which have high taxes onfuels, such price shocks could potentially be mitigatedby reducing the taxes as fuel costs rise. In many Africancountries, on the contrary, this option is not feasible, asthere is limited taxation on oil products in the first place.In some cases, the oil prices are subsidized. African gov-ernments thus face a considerable dilemma: how muchof the increase in oil product prices they should “passthrough” to consumers. The negative effect of risingoil prices is thus potentially large for net oil-importingcountries. In principle, the net effect should be positivefor net oil-exporting countries, as positive effects offset

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Impact of High Oil Prices on African Economies

negative effects. This chapter provides a comprehensiveanalysis of these issues.

4.1 Impact of Oil Prices on Africa

This section reviews and discusses the impact of highoil prices on African economies. The importance of oilproducts for African nations and the marked tendencyfor significant oil price volatility were presented in Chap-ter 2. Only a brief account is thus provided here. This sec-tion focuses primarily on estimating and outlining theeffect of these developments on Africa’s socioeconomicdevelopment.1

A barrel of crude oil was trading between US$18 andUS$23 in the 1990s; it crossed the US$40 mark in 2004;and rose to about US$60 from 2005. During the summerof 2007, the price of one barrel of crude oil jumpedabove US$70 and even crossed the US$147 mark inJuly 2008. Although oil prices are still lower than inthe late 1970s and early 1980s in real terms (inflationadjusted), the recent upsurge can have dramatic conse-quences on oil-importing countries. The impact of highoil prices is likely to be even more severe in countriesthat are overly dependent on oil and/or have limitedaccess to international capital markets. In principle, netoil-exporting countries stand to benefit from the influx

1 The review in this chapter is based primarily on AfDB ResearchDepartment documents (2007); ESMAP (2006); and several (unpublished)Research Papers by the AfDB Research Department.

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Oil and Gas in Africa

of foreign revenue, which they can harness to acceleratethe implementation of poverty reduction strategies andthe attainment of the Millennium Development Goals(MDGs). However, these countries face challenges inmanaging the oil windfalls for the benefit of the wholepopulation, as well as for future generations, and in cush-ioning their economies against any Dutch disease effects(see Chapter 3).

For many developing countries, the increase in oilprices over the last few years has made structural reformof the domestic petroleum pricing system a critical com-ponent of their macroeconomic policies. Although insome countries oil price increases may have been partlyoffset by exchange rate movements (notably the weak-ening of the U.S. dollar against the euro), it has alsohad major socioeconomic impacts. Many governmentshave been reluctant to pass on to consumers a rise ininternational oil prices because of the potential for socialresistance to a policy that could hurt the poor. How-ever, if they do not pass on the higher prices, theircountries could experience a significant fiscal burden,which, in turn, could oblige governments to cut socialspending.

Africa has 38 net oil-importing countries (seeChapters 2 and 3). As outlined above, in these countriesin particular, high oil prices have an adverse impact onbusinesses, consumers, and the government budget, toname a few. As a result, these net oil-importing countriessee their terms of trade deteriorate—jeopardizing their

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balance of payments positions and possibly leading tolower economic growth than in the absence of the oilshock.

4.1.1 Literature Review

A large number of studies have investigated the macro-economic impact of oil price shocks, focusing in particu-lar on the response of economic growth and consumerprice inflation in oil-importing countries (see Barskyand Kilian, 2004; Hamilton, 2005; and Kpodar, 2006).A somewhat smaller body of literature has studiedthe impact of oil price shocks on external accounts(Bruno and Sachs, 1982; Ostry and Reinhart, 1992; andGavin, 1990; and 1992), while yet other studies haveconcentrated on other relevant issues related to oil priceshocks.2

There are fewer studies on the impact of high oilprices on African economies compared with other con-tinents. However, specific studies have been conductedon the effects in Kenya, Nigeria, Mali, Mozambique, and

2 These include the following: Krichene (2006) focused on mone-tary policy and the recent oil shock in the world crude oil markets;Hunt et al. (2001) studied the macroeconomic effects of high oil prices;Hamilton (2000) defined oil shocks and their effect on the economy;Daniel (2001) analyzed the possible solutions for high oil prices and marketrisks for governments; Hossain (2003) studied the taxation and pricing ofpetroleum products in developing countries; Kilian et al. (2007) lookedat the relationship between oil price shocks and external balances; andHunt (2005) studied the role of oil price shocks in the stagflation in the1970s.

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Ghana,3 for example, while more general and continent-wide studies have gained attention in the last few years.4

4.1.2 Impact of High Oil Prices on GDP

There are two principal drivers of the demand for anyproduct: growth in demand and the price of the product.These two drivers can in turn be divided into four factors:(i) The rate of growth of income; (ii) The income elastic-ity of demand for the product; (iii) The rate of increaseof prices; and (iv) The price elasticity of demand for theproduct. Unfortunately, evidence on price and incomeelasticity in developing countries is sparse, partly becauseof lack of data, and tends to be based on data that isseveral years old (ESMAP, 2006).

Although the GDP of a country is a generic measure ofeconomic performance, it gives a fairly good indicationof the magnitude of the impact of oil prices on theeconomy of a given group of countries (see Table 4.1).

3 Studies on the impact of high oil prices in African economies includeworks by the following: Semboja (1994) studied the effects of oil pricechanges in Kenya; Ayadi et al. (2000) and Ayadi (2005) studied the effectsof oil production shocks in Nigeria; Kpodar (2006) looked at the wayinternational oil prices are transferred to household expenditures in Mali;Nicholson et al. (2003) and Coady and Newhouse (2005) explored thedistributional impact of an increase in the price of oil in Mozambique andGhana, respectively; and Coady et al. (2006) studied the magnitude anddistribution of fuel subsidies in developing countries, including in Ghanaand Mali.

4 This includes Bouakez and Vencatachellum (2007); and ESMAP (2006),which both address the impact of high oil prices in net oil-importing andnet oil-exporting countries.

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Tab

le4.

1:A

fric

anG

DP

Gro

wth

Rate

s,by

Cou

ntry

Typ

e,19

96–2

005

Slo

w-g

row

thec

on

om

ies

GD

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row

thle

ssth

an4

per

cen

ta

year

(36.

7p

erce

nt

of

po

pul

atio

n)

Div

ersi

fied

,sus

tain

ed-g

row

thec

on

om

ies

GD

Pg

row

th4

per

cen

ta

year

or

mo

re(3

5.6

per

cen

to

fp

op

ulat

ion

)

Oil

exp

ort

ers

(27.

7p

erce

nt

of

po

pul

atio

n)

Co

untr

yG

DP

gro

wth

(per

cen

t)C

oun

try

GD

Pg

row

th(p

erce

nt)

Co

untr

yG

DP

gro

wth

(per

cen

t)

Zam

bia

3.80

Moz

ambi

que

8.3

Equa

toria

lGui

nea

30.8

Gui

nea

3.70

Rwan

da7.

6C

had

9.0

Nig

er3.

50Sã

oTo

mé

and

Prin

cip

e7.

1A

ngol

a8.

5M

alaw

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30Bo

tsw

ana

6.7

Suda

n6.

3M

aurit

ania

3.30

Uga

nda

6.1

Nig

eria

4.3

Togo

3.30

Cap

eVe

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5.8

Con

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ep.

3.4

Mad

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car

3.20

Mal

i5.

8G

abon

1.1

Leso

tho

3.00

Tanz

ania

5.3

Keny

a2.

90Et

hiop

ia5.

2Er

itrea

2.41

Sier

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one

5.2

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0C

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13M

aurit

ius

4.8

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tral

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ican

Rep

ublic

0.85

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na4.

7G

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0.47

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43Se

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ongo

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The

4.2

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In Africa, 36.7 percent of the population lives inslow economic growth countries (GDP growing less than4 percent a year); 35.6 percent in diversified and sus-tainable growth economies (GDP growing more than4 percent a year); and only 27.7 percent in oil-exportingcountries. This suggests that a 1 percent loss in GDP as aresult of high oil prices will have a greater impact on slowgrowth economies and, consequently, on the majority ofAfrica’s population.

Figures 4.1 to 4.5 show the GDP growth rate between1999 and 2004 in selected countries by sub-region inAfrica. In general, most countries show positive growthbetween the two periods analyzed (1990–1999 and 2000–2004). Although the growth pattern varies by period, itis clear that some countries recorded higher growth atthe turn of the millennium (for example, the Demo-cratic Republic of Congo, Rwanda, Comoros, Kenya,Tanzania, Algeria, Morocco, Tunisia, Sudan, Angola,Zambia, Mozambique, Botswana, Namibia, and SouthAfrica). It is also worth noting that very few countrieshad outright negative economic growth (Central AfricanRepublic, Seychelles, and Zimbabwe).

Improved trade performance, particularly among oilexporters, is considered a major factor of economicgrowth in Africa in 2004 and subsequent years (AfDB,2005). In 2004 oil prices rose 60 percent as a result ofincreased global demand, especially in China and Asia.According to the AfDB (2005), high oil prices are attribut-able to a rise in global demand rather than to supply-side factors. Nevertheless, supply-side factors such as

128


–10

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20

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tral

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ican

Rep

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Con

go,

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ep.

Equ

ator

ial

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Real GDP 1990-1999 Real GDP 2000-2004

Figure 4.1: Average Annual Real GDP Growth in Central Africa

Source: IMF (2006); and AfDB Statistics Department Database (2007).

–4

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6

8

10

Com

oros

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Real GDP 1990-1999 Real GDP 2000-2004

Figure 4.2: Average Annual Real GDP Growth in East Africa


01234567

Algeria Egypt Morocco Tunisia Mauritania Sudan

Real GDP 1990-1999 Real GDP 2000-2004

Figure 4.3: Average Annual Real GDP Growth in North Africa




–8–6–4–202468

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Real GDP 1990-1999 Real GDP 2000-2004

Figure 4.4: Average Annual Real GDP Growth in SouthernAfrica


–10

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15

Ben

in

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kina

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Sen

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Real GDP 1990-1999 Real GDP 2000-2004

Figure 4.5: Average Annual Real GDP Growth in West Africa


the war in Iraq, policy developments in Venezuela, andconflicts in Nigeria contributed to the increase in oilprices in 2004. Suppliers have been attempting to com-ply with established quotas by increasing production.This was the case in 2004 when Angola, Chad, andEquatorial Guinea had their quotas raised four times. The

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main result of high oil prices in oil-exporting countries isincrease in export revenues and hence higher economicgrowth. For example, in 2004 countries like Angola (Fig-ure 4.4), Chad, Congo, Gabon, and Nigeria (Figure 4.5)recorded gains of more than 3 percent.

The impact of high oil trade can also be discussedfrom the perspective of terms of trade in African sub-regions, as shown in Figures 4.6 to 4.9. The figures sug-gest terms of trade gain during the 2000–2004 period.Net oil-exporting countries (such as Algeria, Egypt, andTunisia) have shown steady positive terms of trade index.

GDP data actually supports the view that the aggre-gate output performance of most African countries hasnot been as seriously affected as expected by the impactof higher oil prices in the post-1999 period. This isin contrast with the expected downturn in aggregateoutput predicted by macroeconomic models. In fact,economic growth in the first half of this decade wasfar higher than the record in the 1990s (AfDB, 2005;

0

50

100

150

200

Cam

eroo

n

Cen

tral

Afr

ican

Rep

.

Con

go,

Dem

.R

ep.

Con

go,

Rep

.

Gab

on

Rw

anda

Terms of trade index

Figure 4.6: Terms of Trade in Central African Countries, 2000–2004


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0

50

100

150

Comoros Eritrea Ethiopia Kenya Madagascar Mauritius Tanzania Uganda


Figure 4.7: Terms of Trade in East African Countries, 2000–2004


050

100150200

Algeria Egypt Morocco Tunisia Mauritania Sudan


Figure 4.8: Terms of Trade in North African Countries, 2000–2004


050

100150

Ang

ola

Bot

swan

a

Leso

tho

Mal

awi

Moz

ambi

que

Nam

ibia

Sou

thA

frica

Sw

azila

nd

Zam

bia

Zim

babw

e


Figure 4.9: Terms of Trade in Southern African Countries,2000–2004


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World Bank, 2006e; IMF, 2006). Other macroeconomicvariables such as investment, consumption, inflation,and fiscal balance also showed more robust performance.The available evidence thus suggests that the 2003–2005oil price increase was not associated with any perceptiblechange in economic performance in net oil-importingcountries unlike in the 1970s and the 1980s (Dudineet al., 2006). A similar conclusion was derived from anumber of recent studies (World Bank, 2006a; 2006c; and2006d), and earlier studies (ESMAP, 2005a; and 2005b)that quantified the magnitude of the oil price shocksrelative to the size of the economy.

The impact studies tend to confirm that, based on datafor 2004 and 2005, the slow down in GDP for non-oilexporters has been modest, and inflation has increasedonly slightly (Figure 4.10). These corroborative conclu-sions may just mean that the GDP and the terms of tradeare too coarse as indicators of the real impact of high oilprices in African economies. African economies are veryspecific in the sense that they are dominated by informaleconomies, which are not adequately captured in macro-economic indicators.

In practice, the situation is more complex because oilprices and GDP growth run both ways. High oil pricescould dampen economic growth as experienced duringearlier oil price shocks. A decline in economic growthwould subsequently reduce demand, potentially leadingto a large fall in world oil prices. During this latest rel-atively minor financial crisis, Brent oil prices fell belowUS$10 a barrel (December 1998).

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4.1.3 Impact of High Oil Prices on Domestic Prices

In order to assess the real impact of high oil prices inAfrican economies, it is important to understand thatAfrican economies are changing and significant improve-ments in terms of macroeconomic management arebeing reported, especially the very significant reductionin inflation (Figure 4.10).

The key policy response to the impact of high oilprices is the extent to which governments have passedon the price increases to consumers, or have moderatedthem with subsidies, tax reductions, or pressure on oilcompanies to hold down prices. In the countries that

Figure 4.10: Inflation in African Countries, 2000–2006

Source: IMF (2006).

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have been raising prices, and especially in those thathave been passing on the full price increases to end-users, it is expected that some reduction in the demandfor oil will occur. Where domestic prices have not fullyreflected international price movements, the demandfor oil products tends to stay more buoyant, and thepotential negative effects on the balance of paymentsand GDP are larger. A central issue in the adjustment ofthe economy to any price rise that has occurred is thusthe magnitude of the price elasticity of demand for oilproducts (ESMAP, 2006).

The extent of pass-through can be observed inFigure 4.11. It has been high in most countries; partial inmany countries; and complete in others. A special case isEritrea, where the increase in domestic prices was eighttimes the change in the international price of oil.

Substantially higher prices in recent years areillustrated in Figures 4.12 and 4.13. In fact, domestic

Crude Oil US Retail

–4

–2

0

2

4

6

8

10

12

Beni

n

Burk

ina

Faso

Buru

ndi

Cap

e Ve

rde

Com

oros

Cen

tral A

frica

nR

epub

ilc

Djib

outi

Eritr

ea

Ethi

opia

Gam

bia

(The

)

Gha

na

Gui

nea

Gui

nea-

Biss

au

Keny

a

Leso

tho

Mad

agas

car

Mal

awi

Mal

i

Mau

ritan

ia

Moz

ambi

que

Rw

anda

Sene

gal

Sier

ra L

eone

Tanz

ania

Togo

Uga

nda

Zam

bia

Zim

babw

e

Sao

Tom

e &

Prin

cipe

Cot

e d’

Ivoi

re

(Ivor

y C

oast

)

Figure 4.11: Oil Pass-Through in Selected African Countries,2002–2005


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End 2002 Mid – 2005

0

1

2

3

4

5

6

7

8

Beni

n

Burk

ina

Faso

Buru

ndi

Cap

e Ve

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Com

oros

Cen

tral A

frica

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(The

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a

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ania

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nda

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bia

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babw

e

Sao

Tom

e &

Prin

cipe

Cot

e d’

Ivoi

re (I

vory

Coa

st)

Mal

i

Figure 4.12: African Oil Product Prices Relative to Crude OilPrices (Price in US Cents per Liter)


End 2002 Mid – 2005

0

0.5

1

1.5

2

2.5

3

3.5

4

Beni

n

Burk

ina

Faso

Buru

ndi

Cap

e Ve

rde

Com

oros

Cen

tral A

frica

nR

epub

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Djib

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Eritr

ea

Ethi

opia

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bia

(The

)

Gha

na

Gui

nea

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au

Keny

a

Leso

tho

Mad

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car

Mal

awi

Mau

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ia

Moz

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anda

Sene

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ania

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nda

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babw

e

Sao

Tom

e &

Prin

cipe

Cot

e d’

Ivoi

re (I

vory

Coa

st)

Mal

i

Figure 4.13: African Oil Product Prices Relative to US RetailPrices (Price in US Cents per Liter)


prices in most African countries, which are among thepoorest countries in the world, are higher than in theUnited States.

4.1.4 Social Impacts of High Oil Prices in Africa

In African countries, the social impacts of high oilprices are direct and most outrageous in the poorest

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communities, which do not have electricity and usekerosene for illumination. It is also well known thatincreases in the prices of commodities that featureprominently in the consumption basket of poor house-holds have severe consequences on their living standardsand well-being. In other words, higher oil prices exac-erbate the incidence and depth of poverty and highlydistort income distribution structures.

For net oil exporters, higher oil prices are expected tobe a blessing. However, key economic and social indi-cators for oil-exporting countries suggest that oil wealthhas not been able to support sustained economic growthand development (see Chapter 3). Moreover, inequitabledistribution of oil revenue among the population canfuel social tensions as has been witnessed in the case ofthe Niger Delta region.

4.2 AfDB Model of the Impact of High Oil Prices

4.2.1 Overview of the Model

The Research Department at the African DevelopmentBank (AfDB) has developed a model to quantify theimpact of high oil prices on oil-importing and oil-exporting African economies.5 The analysis is basedon a dynamic stochastic general-equilibrium modelof a small open economy. The model is rigorously

5 “The Impact of High Oil Prices on African Economies,” Working PaperSeries (WPS) No. 93, December 2007, African Development Bank Group,Tunis.

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micro-founded in the sense that agents are fullyoptimizing and form their expectations in a rationalmanner. This modeling approach has several advantages.First, the inter-temporal nature of the model permitsa study of the effects of transitory as well as persis-tent oil price shocks. Second, because the time pathof aggregate variables is determined by the optimizingbehavior of economic agents, the model is robust tothe Lucas critique, and, therefore, appropriate for pol-icy analysis. Third, this approach allows proper welfareanalysis as it provides an explicit account of households’preferences. Fourth, the general-equilibrium perspectiveensures internal consistency and, more importantly,allows the study of the effect of oil prices without makingarbitrary assumptions about what is exogenous and whatis not.

Owing to these advantages, the proposed modelsupersedes existing naive data-based models, reduced-form models, and static computable general-equilibrium(CGE) models. Data-based models are useful to char-acterize the statistical relationships between economicvariables and to establish relevant stylized facts; how-ever, these models lack economic content and do notreveal mechanisms through which shocks propagate.Reduced-form models are often concise and easy to solve,but the aggregate relationships are usually not derivedfrom first principles and the model parameters are notalways invariant to shifts in policy regimes. The samecriticism applies to CGE models, which, in addition,often ignore inter-temporal considerations.

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The proposed model belongs to the class of new open-economy macroeconomic models, which have becomethe main tool used in modern international macroeco-nomics and are increasingly sought by internationalorganizations and Central Banks around the world. Itis a state-of-the-art model that uses cutting-edge tech-niques to address positive and normative issues relatedto the effects of oil price shocks, but which can easily beextended to examine broader questions of relevance tothe AfDB.

The model is one of a small open economy and isadapted specifically to the context of oil and Africaneconomies. It is sufficiently flexible to represent virtu-ally any African country. In particular, it is configuredto describe oil importers and oil exporters, credit-constrained economies and those that have access tointernational financial markets, and countries with flex-ible, managed, and fixed exchange rate regimes. Theeconomy consists of households, firms, a government,and a monetary authority. There are four types of goods:final goods, composite non-oil goods, oil, and interme-diate goods.

4.2.2 Results

This section discusses the impact of a doubling in worldoil prices on main macroeconomic variables both inthe case of a median oil-importing economy and amedian oil-exporting economy. The variables of inter-est are output, consumption, inflation, real exchange

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rate, government budget deficit, and foreign debt. Thesimulations are performed under both a fixed exchangerate regime and a managed float. For each case, twodifferent scenarios are considered: complete and zeropass-through. In all simulations, the oil price shock isassumed to be persistent, with a first-order autocorrela-tion coefficient of 0.85, as estimated from the data. Thisassumption is consistent with the view that the expecteddurability of high oil demand from East Asia (especiallyChina) is sustaining the market expectations that oilprices will remain high.

4.2.2.1 MEDIAN OIL-IMPORTING ECONOMY

This economy is calibrated such that oil imports repre-sent roughly 13 percent of total imports and 5 percentof total GDP in the steady state. Simulation results forthis case are shown in Tables 4.2 and 4.3. The mainconclusions are as follows:

� Under fixed exchange rates and complete pass-through, a doubling in the world price of oil leadsto a decline in output and consumption, a slightincrease in inflation, a small appreciation of the realexchange rate, and moderate changes in public andforeign borrowing. The output loss is about 6 percentduring the first year, while the cumulative loss isabout 24 percent during the five years following theshock. For consumption, the corresponding numbersare 5 and 19 percent, approximately.

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Table 4.2: Effects of a 100% Increase in the Price of Oil(Net Oil-Importing Country, Fixed Exchange Rate Regime)

Impact effect(1 year) %

Cumulative effect(5 years) %

OutputComplete pass-through −6 −24Zero pass-through −1 −5

ConsumptionComplete pass-through −5 −19Zero pass-through −6 −25

InvestmentComplete pass-through −11 −39Zero pass-through −7 −25

InflationComplete pass-through 2 1Zero pass-through −4 −4

Real exchange rateComplete pass-through −2 −7Zero pass-through 4 22

Budget deficitComplete pass-through 4 7Zero pass-through 31 45

Foreign debtComplete pass-through −1 2Zero pass-through 9 11

Note: Budget deficit in percentage of steady-state output.

� The drop in output and consumption is attributedto a combination of two effects of high oil prices:a direct income effect, through the resource con-straint, and a direct effect on production, throughhigher costs of inputs. The former decreases con-sumption and increases labor supply. The latterdecreases demand for non-oil inputs and, by exten-sion, demand for labor and capital. The net effect on

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Table 4.3: Effects of a 100% Increase in the Price of Oil(Net Oil-Importing Country, Managed Floating)



OutputComplete pass-through −6 −23Zero pass-through 2 −1

ConsumptionComplete pass-through −4 −18Zero pass-through −5 −25

InvestmentComplete pass-through −10 −38Zero pass-through −1 −21

InflationComplete pass-through 5 4Zero pass-through 4 5

Real exchange rateComplete pass-through −1 −5Zero pass-through 9 30

Budget deficitComplete pass-through 0 −1Zero pass-through 6 20

Foreign debtComplete pass-through 1 2Zero pass-through 16 12


hours worked is ambiguous, but labor income andinvestment unambiguously fall (due to lower mar-ginal productivity of labor and capital). The resultingreduction in households’ disposable income furtherdecreases consumption and output.

� The increase in inflation is due to the fact thatthe domestic price of oil enters the aggregate priceindex, and since there is complete pass-through,

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oil-price inflation contributes to core inflation. Thehigher inflation explains the appreciation of the realexchange rate (since the nominal exchange rate isfixed).

� Under zero pass-through, the increase in the price ofoil still leads to a decline in output and consumption,but the magnitude of the effects differs significantlycompared with the complete pass-through case. Thedecline in output during the first year is less than 1percent and the cumulative loss during the five yearsfollowing the shock is roughly 5 percent. Hence,by choosing a zero pass-through, the governmentshields the production sector of the economy, thusminimizing the output loss. However, the cost ofthis intervention is a dramatic deterioration in thebudget deficit (31 percent during the first year and45 percent after five years), and, most importantly, alarge decline in consumption, which drops by morethan 6 percent during the first year and 25 percentafter five years.

� Under zero pass-through, there is a decrease in infla-tion, which translates into a real exchange rate depre-ciation of roughly 4 percent in the first year and 22percent after five years.

� Under a managed floating exchange rate regime, thenominal exchange rate is, to a certain extent, freeto adjust, thereby acting as a shock absorber. Inprinciple, therefore, the adverse effects of high oilprices should be less severe compared to the case

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with fixed exchange rates. A comparison of Tables 4.3and 4.4 confirms this intuition. Under completepass-through, however, there are only minor dif-ferences in the response of output, consumption,inflation, and, to a lesser extent, foreign debt acrossthe two regimes.6 The gain from letting the nom-inal exchange rate float is much more apparentunder zero pass-through. For example, output ini-tially increases by almost 2 percent (as opposed to adecline of 1 percent) following the rise in the price ofoil, and the cumulative loss after five years is barelyover 1 percent (as opposed to a loss of 5 percent). Thissmaller output loss is due to the larger depreciationof the real exchange rate relative to the case withpegged nominal exchange rates.

4.2.2.2 MEDIAN OIL-EXPORTING ECONOMY

This economy is calibrated such that oil exports repre-sent roughly 88 percent of total exports and 35 percentof total GDP in the steady state. Simulation results forthis case are shown in Tables 4.4 and 4.5. The mainconclusions are the following:

� Under fixed exchange rates and complete pass-through, a doubling in the world price of oil leads toa 9 percent increase in output, a 42 percent increasein consumption, a 9 percent increase in inflation, a

6 The only notable difference across the two regimes is the responseof the budget deficit, which deteriorates under the peg one, but slightlyimproves under managed floating.

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Table 4.4: Effects of a 100% Increase in the Price of Oil(Net Oil-Exporting Country, Fixed Exchange Rate Regime)



OutputComplete pass-through 9 53Zero pass-through 10 56

ConsumptionComplete pass-through 42 152Zero pass-through 41 149

InvestmentComplete pass-through 16 62Zero pass-through 16 62

InflationComplete pass-through 9 15Zero pass-through 6 14

Real exchange rateComplete pass-through −9 −71Zero pass-through −7 −63

Budget deficitComplete pass-through −114 −147Zero pass-through −108 −139

Foreign debtComplete pass-through −33 −47Zero pass-through −30 −45


9 percent real appreciation, a 114 percent reductionin the budget deficit, and a 33 percent reduction inforeign debt during the first year. The magnitudes ofthe cumulative effects after five years indicate thatthe adjustment of output, the real exchange rate, andforeign debt is non-monotonic.7

7 For example, the model predicts that the response of output to the 100percent increase in the price of oil is hump-shaped, attaining its peak of 16percent during the third year after the shock.

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Table 4.5: Effects of a 100% Increase in the Price of Oil(Net Oil-Exporting Country, Managed Floating)



OutputComplete pass-through 4 25Zero pass-through 4 27

ConsumptionComplete pass-through 16 75Zero pass-through 16 76

InvestmentComplete pass-through 3 22Zero pass-through 4 23

InflationComplete pass-through −13 −12Zero pass-through −14 −13

Real exchange rateComplete pass-through −38 −136Zero pass-through −36 −130

Budget deficitComplete pass-through −7 −24Zero pass-through −6 −23

Foreign debtComplete pass-through −55 −39Zero pass-through −53 −38


� The increase in the price of oil generates a posi-tive income effect, through the resource constraint,which increases consumption. This rise in consump-tion translates into higher demand for the final good,which more than offsets the negative effect of thehigher price of oil. As a result, the demand for oiland non-oil inputs increases (due to their comple-mentarity), thereby raising the demand for labor and

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capital. The resulting increase in labor demand andinvestment further boosts the demand for the finalgood, and, therefore, output.

� Under zero pass-through, there is a slightly largerincrease in output, a lower inflation, and a smallerappreciation of the real exchange rate compared tothe case with complete pass-through. However, this“gain” comes at the expense of a (marginally) smallerincrease in consumption and a smaller improvementin the budget deficit.

� Under managed floating, the output and consump-tion gains induced by the increase in the price ofoil are smaller than under fixed exchange rates.This result is mainly due to the larger appreciationof the real exchange rate under the former regime.The smaller increase in consumption implies thatthe budget deficit narrows less than under the fixedexchange rate regime.

� Under a managed float, the effects of an increase inthe price of oil under complete and zero pass-throughare strikingly similar.

For the sake of comparison, Table 4.5 is generatedwith the same parameters as Table 4.4, except for theexchange rate regime. The deflation reported in Table 4.5arises because the appreciation of the local currencymakes imported goods cheaper. Reducing the share ofimported goods in the economy and running the sim-ulation over would give positive inflation.

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4.2.3 Policy Implications

4.2.3.1 GOVERNMENT INTERVENTION

The above analysis suggests that through local currencypricing (buying at world market prices, but selling atlocal prices), the government can cushion the econ-omy from the adverse effects of oil price shocks inoil-importing countries. However, this policy amplifiesa consumption loss and aggravates the government’sbudget deficit. Hence, the answer to the question ofwhether a government should intervene or not dependson its implicit objective function. To the extent thatthe government is concerned with stabilizing output,local currency pricing proves to be the optimal policy.Alternatively, if the government is a benevolent socialplanner, then laissez-faire and pass-through is likely to bethe welfare-maximizing policy. For oil-exporting coun-tries, government intervention does not seem to affectin a substantive way the outcome of the economy, espe-cially in the case of a managed floating. This observationimplies that both intervention and laissez-faire could beacceptable policy choices in these countries.

4.2.3.2 FOREIGN AID

Can foreign aid help African oil-importing countriescope with high oil prices? Are the required amounts pro-hibitive? Table 4.6 shows the permanent level of overseasdevelopment assistance (in percentage of steady-stateoutput) that is required to completely offset the ini-tial output loss associated with a persistent 100 percent

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Table 4.6: ODA Needed to Offset Output Loss inthe First Year (% of Steady-State Output)

Fixed exchangerate regime

Managedfloating

Complete pass-through 1.60% 1.98%Zero pass-through 0.23% —

Note: ODA: Official Development Assistance.

increase in the price of oil. The table shows that thelargest amount of foreign aid needed is less than 2percent of steady-state output. This amount is clearlynon-prohibitive (foreign aid in a number of Africancountries represents more than 5 percent of GDP), imply-ing that there is scope for international-communityactions to help debt-burdened African economies miti-gate the adverse effects of high oil prices.

4.2.4 Summary of Results

High oil prices can have very harmful effects on theeconomy of African oil-importing countries, especiallythose that are heavily debt-burdened. They lead to adecrease in output and consumption, and to a worseningof the net foreign asset position. For the median oil-importing country, the five-year cumulative output lossresulting from a doubling in the price of oil can be aslarge as 23 percent under a fixed exchange rate regime, asper the model applied. However, this recessionary effectcan be cushioned through government intervention in

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the form of limited pass-through of the oil price increaseor through foreign aid. In this regard, the model can beused to determine the optimal degree of interventionby the government and donors given their objectivefunctions.

For the median oil-exporting country, the five-yearcumulative increase in output associated with a dou-bling in the price of oil exceeds 60 percent, regardlessof the exchange rate regime under which the countryoperates. However, this scenario is accompanied by asharp appreciation in the real exchange rate, which mayhinder the competitiveness of the country. It is there-fore important that accompanying measures be taken tooffset the exchange rate appreciation effect on non-oilsectors.

It should be emphasized, however, that while theanalysis above focuses on “median” countries, there is,in fact, a great deal of heterogeneity within the groupsof oil-importing countries and oil-exporting countries.This means that the effects of oil price shocks can dif-fer dramatically from one country to another. As statedabove, however, the proposed model can be configuredto represent any of these countries.

An important question that the model does notaddress is the effect of high oil prices on poverty, whichis a crucial dimension in the African context. The modelcan, in principle, be extended to capture this featureby allowing for heterogeneity across households and byassuming that some of them have liquidity constraints.The model can also be extended to include other types

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of shocks, such as productivity shocks, monetary-policyshocks, and world-interest-rate shocks.

4.3 Coping with High Oil Prices

Africa as a whole has in recent years been enjoy-ing gains from macroeconomic management, improvedpolitical stability and governance, easing of regionalconflicts, strengthening of regional economic blocks,and increased agricultural, mineral, and oil production.Before the financial crisis, many African economies weremoving towards fast and steady economic growth. Theirperformance over 1995–2007 reversed the collapses over1975–85 and the stagnations over 1985–95. And, for thefirst time in three decades, African economies were grow-ing at the same rate as the rest of the world economies.Average growth in the Sub-Saharan economies was 5.4percent in 2005 and 2006. However, sustaining highgrowth rates has been a chronic challenge for Africancountries as they confront shocks including high oilprices.

Coping with high oil prices requires a set of measuresto maximize the positive impacts and mitigate the neg-ative impacts. The negative impacts are more intensefor net oil importers, but can (as described in earliersections) be mitigated through government initiatives orthrough foreign aid. Specifically, some of the measuresthat governments can implement to cope with high oilprices include the following (ESMAP, 2006):

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� Price-based policies (comprising full passing on ofprice increases and subsidies of end-user prices;

� Policies to reduce the cost of supply (hedging,economies of scale, security of stocks);

� Quantity-based policies;� Diversification into non-petroleum sources of energy

(natural gas, renewable power sources, biofuels);� Increasing domestic supply; and� Domestic policies (for example, winning public buy-

in of government actions).

4.3.1 Price-Based Policies

4.3.1.1 FULL PASSING ON OF PRICE INCREASES

In a completely deregulated market, price increases arepassed on fully to consumers. Linking domestic pricesto international prices in a pricing formula attempts tomimic a deregulated market (Research Division, 2007).A formula-based pricing mechanism raises the questionof the frequency of adjustment and the time periodover which the reference price is averaged. Given thevolatility of world product prices, in countries wheregovernments wish to exercise some measure of controlover pricing, it may be reasonable to take a movingaverage of actual prices spread over a period of more thanone month. However, less frequent price adjustmentsbased on a moving average of several months will leadto a temporary need to finance the difference betweenactual prices and smoothed recommended prices and

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possibly large adjustments when price adjustments arefinally made. In these cases, there is the risk of allow-ing the formula price to diverge more sharply from theactual international price, with the consequent burdenon financing. Less frequent price changes run the riskof needing to increase the formula-based price at a timewhen current market prices are decreasing, thus addingto consumer confusion and antagonism.

Adjusting formula prices very frequently, whatever thelength of moving average chosen, is likely to track pricesmore closely, but it does impose increased administra-tion costs for the process.

Another option to solve the problem would be tochange prices when international (spot) prices changeby more than a certain percentage in local currency.Retail prices in this case are adjusted as a result offoreign exchange fluctuations, international oil pricemovement, or both. The larger the minimum percentagechange set to trigger an adjustment, the less frequentlyprices will be changed, but the larger the change. Thismechanism shields consumers from small, frequent pricechanges, but does not achieve price smoothing in theface of large fluctuations (large price shocks outside ofthe price band are instantly passed on to consumers).

Petroleum product price stabilization funds have beenused in some countries to manage revenue shortfallsin times of rising oil prices. However, a fund that hasnot accumulated large funds before the recent oil priceincrease would be unable to smooth prices without aninitial transfer from the government.

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A related policy is the establishment of a strategicstock, where the government acquires and stores crudeoil or products at a time of lower prices, to be releasedwhen there is an actual supply shortage or a spike inworld market prices. The difference in the prices expe-rienced may be sufficiently large to cover the costs offinancing the purchase and storing the oil. A furtherdevelopment for smoothing prices to final users wouldbe for the appropriate government agency to hedgefuture product prices.

Governments that consider a full pass-through ofprices to consumers are more concerned with the effectson the rate of inflation as well as on fuel purchasers.If the price rise were to become embedded into thecore rate of inflation, macroeconomic policies would beneeded to control the inflation created. This usually callsfor tighter control over monetary policy and some formof wage restraint. These issues will be even more severefor a government that subsidizes product prices and isconsidering removing the subsidies and setting prices atthe international market level.

4.3.1.2 SUBSIDIES OF END-USER PRICES

Subsidies can be regarded as any government interven-tion that lowers the price of a fuel below its economicopportunity cost. These relate to the structure of costs,and to whether or not the country is an oil producerand refiner (Research Division, 2007). There are, indeed,

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various points along the supply chain where subsidiescan be introduced.8

Even before the recent acceleration in oil priceincreases, a number of countries were subsidizing someor all petroleum product prices for final users. Becausethe burden of a complete subsidy to cover all oil pricerises since 2004 has been higher and higher, govern-ments have been anxious to find schemes that subsidizeonly part of the price increase, largely by providing dif-ferential subsidies on the various products and to differ-ent consumer groups.

The amount of the subsidy and its magnitude fordifferent products has to be decided by individual gov-ernments on the strength of country-based analysis.Government decisions on subsidies thus depend on vari-ous factors that include share distribution of the differentpetroleum products in their total demand, specific use,economic groups within society, but, first and fore-most, the finance ability (funds) available to financeon a sustained basis. For example, in a country wheregasoline imports are significant and gasoline is knownto be consumed mainly by private vehicles owned bybetter-off households, the government may decide notto subsidize gasoline imports. In contrast, if diesel isused for agriculture and long distance transport of goodsand people, usually benefiting a wider population andfueling the domestic economy, the government may

8 ESMAP (2006) provides a framework and several relevant examples.

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decide to subsidize—totally or partially—the impacts ofhigh prices on diesel imports. The government may alsodecide to subsidize the import of kerosene, known to belargely used by low-income households, in a desire toprotect this segment of the society.

Subsidies are usually enacted through controlled finalprices, possibly fixed by a formula that passes on onlya fraction of international price increases. Where petro-leum product sales are in the hands of a state body, itmay attempt to finance its shortfall through borrowingfrom the domestic banking system, but such a policymay not be sustainable.

4.3.2 Policies to Reduce the Cost of Supply

If the cost of supply can be lowered in a market-basedway and the cost reductions passed on to consumers,end-user prices would not rise as much. Governmentshave sought to reduce costs or margins in the down-stream petroleum product sector in a number of ways,depending on the government’s ability to finance(Research Division, 2007).

4.3.2.1 CREATING ECONOMIES OF SCALE

In smaller economies, each supplier may be too smallto obtain the lowest possible price for imported prod-ucts. Accordingly, some countries have established bulkpurchasing agencies (for example, in Mozambique allcompanies request the required quantity in a specific

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period; the government body procures the productsand after sealing the deal collects the equivalent valuefrom each company) or agreements between compa-nies, so that economies of scale can be obtainedthrough single purchasing arrangements. The central-ized procurement system allows governments to con-trol the minimum and maximum prices according toan added transport differential and allowed maximummark-up.

4.3.2.2 HEDGING PRODUCT PURCHASES

Commercial companies, particularly those that are sub-sidiaries of large international companies, may well haveconsiderable experience to draw upon in hedging prod-uct purchases. This can help smooth out variations inthe costs of purchasing products, but cannot be expectedto lower the average price paid over a lengthy period.Governments may wish to be informed of purchasingcosts, especially in a regulated system, but are unlikelyto wish to mandate private sector hedging.

4.3.2.3 ENSURING SECURITY OF STOCKS

Many governments require product marketers to carrya certain amount of security stocks (measured in termsof a given number of days of normal consumption).This provides a buffer against disruptions in supplycaused by possible delays in delivery. As a precautionagainst more erratic supply conditions that appear to be

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associated with price spikes in the market, governmentscan increase this requirement, or establish their ownsecurity stocks. A mechanism for bearing the cost of thestocks has to be agreed. These costs include both theinterest on working capital tied up, as well as the costsof the storage facilities themselves.

It is possible to use these stocks to smooth out largeswings in prices, but this strategy is likely to be effectiveonly in short-lasting price hikes; in this case, purchasingof supplies can be delayed until the price returns tonormal. Security stocks are more likely to be used whenthere is physical disruption, and supplies are actually dis-rupted. Landlocked countries, which have very limitedsources of supply, are usually the most vulnerable to suchdisruptions and have the greatest need of some securitycover from extra stocks.

4.3.2.4 INTRODUCING COMPETITIONFOR THE MARKET

If the government wishes to maintain ownership of thedownstream sector but is prepared to entrust its manage-ment to a private sector company, it can use a “man-agement contract” approach in which private sectoroperators bid for the right to operate the market. The bidscan be tied to the price formula whereby the best bid isthe one that will deliver the lowest price. These schemesusually limit the duration of the contract and give thegovernment the right to appoint another operator after aperiod of time. This approach may be especially relevant

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for supplying remote areas. Some governments imposepan-territorial pricing to protect consumers in remoteareas that are expensive to supply. Instead of imposingpan-territorial pricing, it may be more cost-effective toliberalize pricing and offer protection to consumers inremote areas by means of, for example, competition foran exclusive right to supply certain regions at the lowestsubsidy. The supervision and control of compliance withsuch measures will impose a big challenge to govern-ments.

4.3.2.5 INCREASING THE NUMBER OF SUPPLIERSIN THE MARKET

Where the downstream market is already privatized, gov-ernments can still increase the number of suppliers byplacing legal limits on market shares at various stages ofthe downstream. This policy requires existing firms todivest some of their assets. Policies toward the numberof competing suppliers in a market depend on the sizeof that market. For a large market, each of a number ofsuppliers can achieve a large enough turnover to enjoythe available economies of scale. For a small market,however, dilution of market share can result in a loss ofeconomies of scale that would negate any cost reductionsfrom a more competitive environment. Countries thathave permitted a very large number of firms at retail tendto find that these are not necessarily efficient and thatthey are difficult to monitor for pricing, quantity, andquality purposes.

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4.3.3 Quantity-Based Policies

Many countries have considered quantity-based policieswith respect to a wider issue of security of supply foroil and petroleum products, of which higher prices area subset. These policies come in two principal forms:

� Policies that effectively ration the purchase of oilproducts; and

� Policies that effectively ration activities that inten-sively use oil products.

Schemes for rationing the purchase of petroleum prod-ucts that are sold at a large number of outlets, as is typicalfor transportation fuels and for kerosene, cannot rely onthe seller to impose a ration based on previous purchasesby an individual consumer. These can be achieved bysetting differentiated maximum limits per week for pri-vate and commercial vehicles. An effective ration systemserves to cut demand, but rationing a commodity almostinevitably leads to a black market.

4.3.4 Increasing Domestic Supply

An increasing number of countries are promoting oiland gas development. With rising oil prices, the eco-nomics of exploration, development, and productionhave changed. Even in areas where past exploration didnot yield promising results, there are hopes that newerexploration technologies might lead to commercial dis-coveries. This is the case of Africa, particularly in the

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Indian Ocean shoreline, where exploration efforts haveidentified potential reserves in Madagascar, South Africa,Mozambique, Tanzania, Kenya, and Uganda as new ven-tures for oil companies.

A variation on increasing the domestic supply of oiland gas is increasing domestic refining capacity. Severalarguments have been put forward in favor of enhancingrefining capacity (ESMAP, 2006):

� Although a fundamental disagreement persists overthe causes of higher oil prices, some industry analystshave argued that one reason is tight refining capac-ity. Increasing refining capacity would address thisbottleneck directly and would, in time, help lowerworld oil prices.

� Sufficient domestic refining capacity could enhancesecurity of supply of refined products.

� Refining margins have widened in recent years, espe-cially for complex refineries with conversion capac-ity that can convert lower-priced heavy crude intolight products (LPG, gasoline, kerosene, and diesel).Domestic refineries can capture higher margins andpass benefits on to the economy through taxes paidto the government. It is important to note, however,that refining margins fluctuate widely.

Significant economies of scale are an important assetin refining. Many refineries in developing countries aredoing poorly even in the current climate of high refiningmargins because they are too small and lack sufficient

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conversion capacity. Small-scale refineries are unable tocapture the economies of scale that are necessary tobring costs to a level that can compete with internationalprices.

The other important factor in the refining industry isthe capital costs of constructing competitive refineries,which are very large and would constitute a substantialfiscal burden for any government that chooses to supporta state-owned oil company that wishes to enter such amarket.

The refinery industry requires large quantities of crudeoil, which means that the best location of a refinery isclose to a deep sea port. African countries are alreadythinking about increasing the refinery capacity in theregion. Mozambique, for example, is setting up a US$ 7billion investment refinery in the Nacala deep sea port.

4.3.5 Diversification into Non-Petroleum Sources of Energy

Reliance on oil can be reduced by diversifying into non-petroleum sources of energy. The most common alterna-tives are natural gas and renewable sources of electricitysuch as hydro, geothermal, solar, and wind. Biofuels areattracting growing attention as a substitute for liquidtransportation fuels. Some consumers are forced back touse more solid biomass, with damaging public healthand environmental effects.

There are economies of scale in laying down pipelines.A pipeline network is economically viable if there

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are large consumers (such as power plants and largeindustrial operations). Natural gas prices have risenmarkedly in recent years, broadly tracking world oil priceincreases.

A policy of promoting the blending of a certain pro-portion of ethanol into gasoline or biodiesel into dieselwill reduce the total use of petroleum transportationfuels. This policy may help reduce the fuel import bill inthe short run if a country can import at prices lower thanthose of petroleum fuels, or if there is surplus feedstockand production capacity.

The use of biofuels supports several major energy pol-icy objectives:

� Energy security: Biofuels can readily displace petro-leum fuels, and, in many countries, can provide adomestic rather than imported source of transportfuel. Even if imported, ethanol and biodiesel willlikely come from regions other than those produc-ing petroleum (for example, Latin America ratherthan the Middle East), creating a much broaderglobal diversification of supply sources of energy fortransport;

� Environment: Biofuels are generally more climate-friendly than petroleum fuels, with lower emissionsof CO2 and other greenhouse gases;

� Fuel quality: Refiners and car manufacturers havebecome very interested in the benefits of ethanol inorder to boost fuel octane, especially where other

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potential octane enhancers, such as MTBE (methyl-tertio-butyl-ether), are discouraged or prohibited;

� Sustainability in transportation is derived fromrenewable energy.

4.3.6 Other Domestic Policies

A number of governments that have attempted to elimi-nate subsidies on petroleum products by imposing largeprice increases have faced strong reaction from civilsociety—trade unions and non-affiliated groups (theriots in Mozambique in February 2008, for example, weredue to a more than 50 percent rise in public transportcosts as a consequence of high oil prices). Political oppo-sition parties have also built on hostility to these priceincreases to encourage demonstrations and protests,which may be opportunistic, but which may also beaimed at wider dissatisfaction with the government.

Many governments have deliberately adopted poli-cies that reduce the burden of higher prices on certaingroups within society. Policies that are transparent informulation and implementation are more likely to beaccepted than those that are not. Transparency entailsboth making information widely available to the publicand selecting measures that are easily verifiable.

4.4 Summary and Conclusion

In summary, the role of economic policy—at both themicro and macro levels—in mitigating the potential

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adverse economic impact of higher oil prices cannot beoveremphasized. The impact of changes in oil and gasprices will remain an important issue in the debate onAfrica’s social, economic, and political development. Sus-tained development and substantial improvement in theliving standards of the people depend fundamentally onsecure energy resources, and, in the short term, at least,adequate supplies of oil and gas at affordable prices.

A fundamental disagreement persists about the causesof higher oil prices, and some industry analysts haveargued that one of the causes is tight refining capacity.Increasing refining capacity would address this bottle-neck directly and would, in time, help lower world oilprices. Having sufficient domestic refining capacity couldenhance security of supply of refined products.

Regardless of the reasons, the economic impact ofhigher oil and gas prices is devastating and includesreduction in economic growth and in household well-being as a result of real income decline, macroeconomicdisequilibrium, and inflation. The adverse economic andsocial effects of higher oil prices are often greater innet oil-importing economies. The challenge is to designrobust policies that will mitigate these economic effects.Notably, the emerging macroeconomic evidence suggeststhat net oil-importing and more oil shock-prone Africancountries have a greater capacity for coping with recentoil price shocks.

Higher crude oil prices are often associated withgreater profits from upstream oil activities by interna-tional and national oil companies. Where these are

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vertically integrated into refining and selling petroleumproducts, there is a widespread demand from consumersthat some of the profit be returned to them in the formof lower prices. For companies that are not involvedin upstream oil production, a policy that limits priceincreases may not be sustainable, unless there are inef-ficiencies in supply that they can remove under the pres-sure of reduced profits.

In several countries, especially in net oil-exportingcountries, many governments are not willing to fullyaccept the tradeoffs between the distributive effect andefficiency considerations associated with competitive oilmarkets because of popular opposition to substantialupward adjustment in the pump prices of oil products.This makes the product essentially a political good in anumber of countries. The price differential in oil- andnon-oil-exporting countries reflects the political contentof oil product pricing in the region—hence the appropri-ate price of oil products remains a controversial issue inmany countries in Africa. Administered pricing is com-mon in the region. The size of the pass-through is alsocontentious. In some countries, the pass-through is full,while in others, it is partial. Obviously, in dealing withthe demand and supply dimensions of expended energyaccess, oil and gas pricing, the size of the pass-throughand oil and gas market liberalization are essential ele-ments in the energy equation.

Coping mechanisms depend on country-specific cir-cumstances, especially the country’s ability to cushionthe effects of high oil prices on vulnerable groups.

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Coping policy mechanisms could include issues relatedto strategic reserves and inventories, managed as a defen-sive stockpile. Oil price shocks in many African countriescan be partially mitigated given innovative oil inven-tory management strategies. Yet, most of the countriesdo not have, or cannot afford to have, any sizable oilinventory.

In some countries, governments have ensured thatprices charged by companies do not rise as fast as thecosts of products on the world market. The policiesused to achieve this have been either mandatory, whereprice caps have been placed on petroleum products,or exhortatory, whereby governments have encouragedsuch action. In either case, if there is no offsetting com-pensation from the government, the company bears theburden of the price rise.

The resilience of economies in coping with the chal-lenges of oil price shocks is a function of their conditionsprior to and during the shocks. How to finance higheroil prices, especially in developing countries, remainsa contentious issue. Increased transparency will betterinform consumers and policy-makers in the executiveand legislative branches about factors that affect the leveland volatility of prices for refined petroleum products.

African oil exporters need to establish and enforceprudent fiscal rules to smooth surplus export receiptsover time, invest them for future growth, and minimizewasteful spending.

A key challenge for policy-makers in Africa is design-ing the optimal policy mix that would help African

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countries cope efficiently with the economic and socialcosts of the external shocks accompanying higher oiland gas prices. In more recent times, macroeconomicpolicies have been more robust to the oil price dynamics.However, what has emerged as consensus among ana-lysts is that micro- and macroeconomic policies can helpmitigate the potential adverse economic impact of highoil prices.

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impact of high oil prices on african economies

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