Managing Commodity Lifecycles, Petroleum

7. Key issues for policy-makers

  • It is important, both from the perspective of short-term fiscal revenue management and longer-term country sustainable development, that a relatively high proportion of petroleum government revenue generated by exploitation of subsoil reserves are directed towards investment, and for building precautionary buffers and savings. The allocation of revenues between those objectives may depend on the petroleum maturity of the country, the level of its petroleum reserves and revenues and the stage of the country development. 

  • A major part of such investment needs to be directed towards improving the long-run structural capabilities of the economy, through investment in infrastructure, health, education and training for example, and by promoting economic diversification into non-petroleum tradable activities.

  • For many countries, it may make sense to direct a proportion of investment from petroleum revenue into overseas financial assets during times of high petroleum prices so as to build up a specific sovereign wealth fund (SWF) which can be drawn on in harder times or across generations and which can help mitigate damaging swings in exchange rates or other macroeconomic indicators.

  • Countries may decide that savings derived from petroleum revenues may be held in central bank reserves instead of creating a specific sovereign wealth fund. However, in all cases the allocation of such savings and their spending shall be authorized through the normal annual budget process and not be decided on a government discretionary basis. 

  • Protecting the country future petroleum revenues by hedging them remain an exceptional solution and is often not the preferred option of producing countries which give priority to the above-mentioned solutions. The reasons are that such option would be relatively costly, politically difficult to explain to citizens when prices rise, and above all the size of hedging markets is not enough important to hedge a major part of petroleum government revenues. 

  • In order to build a consensus around policies for development and restrict the scope for corruption, it is important that the source of petroleum public revenues and the distribution of these revenues be made open and fully transparent.