Cantore, N; Antimiani, A; Anciaes, PR; (2012) Energy price shocks: sweet and sour consequences in developing countries. (Overseas Development Institute Working Papers Series 335). Overseas Development Institute: London, UK.

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Abstract

This paper discusses the effects of recent energy price changes on developing countries. It reviews the transmission channels between energy prices and growth and distribution in developing countries based on the most recent literature; employs a Computable General Equilibrium (CGE) model to identify the most vulnerable countries; and presents three brief country case studies analysing policy responses to oil shocks in more detail (Nigeria, Malawi and Ghana). The issue of energy shocks is crucial, as oil prices affect growth. Since Brent oil prices hit a 2011 high of $127 a barrel in April 2011, as the conflict in Libya shut down its supplies, the International Energy Agency (IEA) has repeatedly said that oil prices pose a threat to growth. In 2011, the IEA estimated nominal oil prices of $114 a barrel in 2015, revising its 2010 estimate of $104 a barrel upward. / Oil prices and developing country growth: An increase in oil prices has a negative effect on oil-importing countries making their input costs are greater. Meanwhile, it is commonly thought that oil prices will benefit oil exporters through improved terms of trade, at least in the short run. However, if we take into account the decrease in world gross domestic product (GDP) induced by higher oil prices and the competitiveness (production costs) of nonoil sectors in oil-exporting country, higher oil prices may eventually lower incomes in all developing countries. We estimate that, in terms of real GDP, African countries may suffer up to a 3% loss from a doubling of oil prices. / Oil prices, poverty and distribution: Because of their effect on employment and on food and transport prices, oil price shocks also have important distributional impacts within each country. Evidence shows that recent energy price shocks have increased food insecurity and poverty levels in developing countries. Some population segments have a higher degree of vulnerability, including the poor, the landless, informal sector workers and female-headed households. Evidence from household surveys in several countries shows that oil price shocks tend to have a stronger effect on poorer households, as a higher proportion of their expenditure goes towards oil products. / Effects of recent oil price changes in selected case study countries: Reviewing the experience of Nigeria, we find that oil price increases can harm countries with abundant oil but low refinery capacity. In such cases, an oil price will lead to fuel price stabilisation policies such as fossil fuel subsidies, which affect the national budget negatively and generate adverse environmental effects. Countries with oil reserves such as Ghana may suffer ‘Dutch disease’, which may reduce long-term growth by making the national currency stronger and diverting resources from other exportable production to national consumption. In Malawi, physical fuel scarcity generated by a lack of foreign reserves has been exacerbated by economic scarcity deriving from fuel price increases. / Conclusions: Many developing countries are already putting in place policy responses to reduce their dependence on oil (e.g. energy conservation, diversification) but, as our case studies show, long-term commitment to such policies outside the political and/or electoral cycle, government effectiveness, real independence of regulatory bodies and technical skills of decision makers need to be in place for the successful implementation of appropriate actions to reduce vulnerability or cope with oil price increases. Policies to cope with oil price crises include the strengthening of refinery capacity for countries with oil endowments, interventions promoting a structural change towards green sources of energy, the creation of strategic petroleum reserves and hedging strategies.

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