Oil and gas prices have shown an upward trend since the beginning of 2003, and reached a nominal high of $78 in the summer of 2006. Rising oil prices have put pressure on developing countries to cope with increased expenditure on oil imports, as well as pressure on foreign exchange reserves and widening balance of payments.

A survey of African importers by the African Development Bank shows that 28 countries spend more than 10% of their total import bill on oil. If oil prices remain at such high levels, the transportation sector – the most vulnerable to high oil prices in developing countries – will be strongly impacted, thus affecting the movement and supply of goods and therefore on economic activity.

Net oil importers may also face rising budget deficits, higher inflation and rising unemployment when oil prices rise. To mitigate the impact of higher oil prices, oil-importing countries should adopt policies that allow them to “spread” the cost over a longer period of time. However, compensatory financing schemes are little used due to practical difficulties, although the Petrocaribe scheme set up in the Caribbean shows some promise.

African countries that export significant quantities of oil stand to benefit from high oil prices, but a significant impact on development can only be achieved if extra income is channelled to health, education, capacity-building; and other development projects without exceeding the absorptive capacity of their economies.

The main policy objectives for oil exporting countries are therefore to:

• avoid the inflows of oil revenues leading to real exchange rate appreciation; and
  
  
• channel the revenues effectively to address development needs.

To achieve the first objective, oil revenues that exceed the absorption capacity of the economy can be invested abroad. With respect to the second objective, many countries have established funds to stabilize financial flows over the medium to long term.