Managing Commodity Lifecycles, Petroleum

1. Why commodity cycles need to be managed

Petroleum price cycles mean that the country petroleum revenues may highly fluctuate from year to year. Often, such huge variations cannot be accurately forecasted in advance, even when preparing the next year budget. That price cyclicality and volatility also apply to petroleum companies’ revenues and profits with the immediate consequence that their capital expenditure on exploration and development can vary considerably from year to year.  They also have dramatic effects on country macroeconomics, inflation, public borrowing capacity, exchange rates and growth of any petroleum country.

Revenue volatility is the most critical revenue management challenge for a nation. Countries with large petroleum upstream sectors need explicitly to acknowledge these industry characteristics in designing their fiscal policies and when adopting the related fiscal framework and rules, both with regards to the short-term and also to the development of structural defences to manage petroleum price volatility at medium- and longer-term, addressing the cases of booms and busts during cycles.

Finding the respective ideal rate of public spending, investment and saving in relation with the government petroleum revenue is a key decision for any government of a resource-dependent country. It should ensure the long term fiscal sustainability that is the government’s ability to continue servicing its debt and prevent budget deficits in order to attenuate fiscal vulnerability.