Managing Oil Price Risk in Developing Countries

Abstract

This article presents a simple framework for understanding the impact of oil dependence on growth in terms of an optimal savings and investment strategy. Among the more important factors underlying this strategy is the extent to which oil price changes are temporary or permanent. This in turn determines whether a country should rely on stabilization and savings funds or the use of financial instruments to manage oil revenues—or both. Country experiences with stabilization and savings funds are surveyed, and the case is presented for using financial instrument to manage oil price risk. Policy implications for enhancing the use of financial instruments are explored, including an expanded role for international financial institutions.

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