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Mr. Jeffrey M. Davis, Ms. Annalisa Fedelino, and Mr. Rolando Ossowski

from (29) that the lower the oil income tax rate (t) and the lower the share of paid-in dividends (α), the lower the drop in government take due to petroleum products price subsidies and marketing and retailing costs associated with increases in domestic sales. On the other hand, the higher the income tax rate (t) and the government’s share in the NOC’s profit after tax (α), the higher the pass-through of those subsidies and costs to lower government take. VI. Change in Retained Dividends The retained dividends (RD) are the share of profits after tax

Mr. Ricardo Hausmann

Abstract

It is often said that most people when reading about a theory wonder if it works in practice. Economists, when seeing things working in practice, wonder if they work in theory. The natural resource curse is a case in point. Countries highly dependent on oil or other natural resources have performed very poorly since 1980. Figure 2.1 shows GDP per capita at purchasing power parity for highly resource-intensive countries such as Saudi Arabia, Nigeria, Venezuela, and Zaire, and for less intensive countries such as Indonesia and Mexico. The pattern is clear: the more dependent performed remarkably poorly. The less oil-dependent did better.

Mr. Martin Petri

Abstract

Adecade into the transition, many of the successor states of the former Soviet Union (FSU) still struggle with adapting their energy sectors to the market economy model they have embraced. Across the FSU, energy sectors are still characterized by a high degree of government ownership, strong vertical integration within the energy sector, low and administratively set energy prices, cross-subsidization, and excessive operational losses. International and domestic barter trade can still be found in energy sector operations, and in many FSU countries, energy companies continue to function as quasifiscal institutions and social safety nets, providing large implicit subsidies to households and (state-owned) enterprises through low energy prices, preferential tariffs or free provision of services to privileged groups, the toleration of payment arrears, and noncash arrangements.2 For example, currently only Armenia, Georgia, and Moldova seem to charge electricity tariffs that are high enough to recover economic costs (i.e., including investment). As a result, energy sector operations across the FSU continue to give rise to large distortions and inefficiencies that hamper structural change and growth, while complicating fiscal policy and posing substantial risks to macro-economic stability.

Mr. James Daniel

Abstract

Oil price risk is the risk that oil prices may change rapidly, substantially, and unpredictably. Governments are subject to this risk in two main ways. Governments of oil-producing countries often rely heavily on revenue from oil production. Governments that administratively set oil-related product prices will suffer financially when the input price rises if they do not raise output prices (Gupta and others, see Chapter 15 in this volume). And, in both cases, governments will be very aware of the social, political, and economic costs of volatile oil prices. Governments have tried to deal with the problem of their oil price risk exposure in a variety of ways, for example, stabilization funds. But these methods are, to a greater or lesser extent, flawed, as the government is still bearing oil price risk that it is inherently illsuited to bear.

Mr. Jeffrey M. Davis, Ms. Annalisa Fedelino, and Mr. Rolando Ossowski

Abstract

Countries with large oil resources can benefit substantially from them. However, despite their huge natural resources, many oil producers have had disappointing growth, widespread poverty, and continuing vulnerability to oil price and other external shocks. Fiscal policy can play a central role indetermining the extent to which a country benefits from its oil wealth. This book brings together studies that provide analysis and findings on fiscal policy issues in oil-producing countries from a diverse international perspective. A key focus for the authors is how to manage oil resources in a way that contributes to a stable macroeconomic environment, sustainable growth, and poverty reduction.

Mr. Jeffrey M. Davis

Abstract

Acountry with large exhaustible resources such as oil can benefit substantially from them, but the revenues from exploiting these resources can pose challenges. Fiscal policymakers need to decide how expenditures can be planned and insulated from revenue shocks arising from the volatility and unpredictability of resource prices. Decisions also need to be made on the extent to which resources should be saved for future generations.

Mr. Steven A Barnett

Abstract

Understanding the statistical properties of oil prices is important for fiscal policy formulation in oil-producing countries. Specifically, the extent to which oil price changes are believed to be persistent or temporary is likely to have substantial implications for the optimal fiscal policy. Barnett and Ossowski (see Chapter 3 in this volume) argue that government oil wealth—defined as the present discounted value of government oil revenue—is a key input for assessing the sustainability of fiscal policy. Therefore, and looking only at sustainability considerations, the optimal fiscal response to an oil price shock depends on how much the shock changes government wealth.2 This, in turn, hinges on the extent to which the shock is permanent or transitory.

Mr. Emil M Sunley

Abstract

Oil and gas extraction plays a dominant role as a source of export earnings and, to a lesser extent, employment in many developing countries. But the most important benefit for a country from development of the oil and gas sector is likely to be its fiscal role in generating tax and other revenue for the government. To ensure that the state as resource owner receives an appropriate share of the economic rent generated from extraction of oil and gas, the fiscal regime must be appropriately designed.

Mr. Giorgio Brosio

Abstract

Although the theory hardly recommends revenues from oil and gas as an ideal source of finance for subnational governments—with the exception of funds to compensate social and environment damages and to finance additional needs for infrastructure in the producing areas—the role these revenues play in subnational budgets is expanding worldwide. Matching the current general trend toward more decentralized governments, national regulation and taxation policies of the oil sector are increasingly recognizing the right of subnational governments to have a greater share of the resources generated by this sector. In fact, a large number of oil- and natural gas-producing countries have recently introduced sharing arrangements among different levels of government (see Table 10.1). A similar trend is taking place in favor of indigenous peoples and their formal, or informal, organizations (see Andrews-Speed and Rogers, 1999; Clark and Clark, 1999; O’Faircheallaigh, 1998; United Nations ESCAP, 2001). Basically, the allocation of oil rents among levels of governments is following a pattern quite similar to that of other mineral rents.

Mr. Sanjeev Gupta

Abstract

Petroleum product prices are often heavily regulated. Domestic price controls are prevalent, especially in countries that are net exporters of oil. Governments often keep prices well below international levels, resulting in the implicit subsidization of oil consumption. However, as these subsidies are typically not recorded in government budgets as expenditures, their economic cost, as well as the incidence on different income classes, is often poorly understood. The lack of readily available estimates of the size of these implicit subsidies has thus precluded a fuller discussion of their costs and benefits. Good fiscal policy management requires that the cost of all government activities, including such quasi-fiscal ones, be made transparent.2