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Energy price shocks: sweet and sour consequences for developing countries

Working paper

Working paper

This Working Paper discusses the effects of recent energy price changes on developing countries. The study examines energy price shocks and focuses on:

  1. The transmission channels linking energy prices to growth in developing countries based on the most recent literature;
  2. a mapping exercise identifying the most vulnerable countries using a Computable General Equilibrium (CGE) model; and
  3. three brief country case studies analysing policy responses to oil shocks in more detail. The recent experience in Nigeria, where energy subsidies were removed, suggests it is important to examine individual cases in more depth, including the political incentives.

Many developing countries are already putting in place policy responses to reduce their dependence on oil (e.g. energy conservation, diversification) but, as these case studies of Nigeria, Malawi and Ghana 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.

The structure of this paper is as follows. Section 2 reviews the determinants and impacts of oil price shocks based on the literature and recent evidence of oil price changes. Section 3 examines the possible effects in more detail using the GTAP E model. Section 4 includes a number of case studies with a focus on the impact of energy price shocks, policy responses and analysis of the facts in these countries. Section 5 concludes by drawing policy implications.

Nicola Cantore with Alessandro Antimiani and Paulo Rui Anciaes