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Box 1.5 The benefits and hazards of oil funds Pitfalls of oil funds- outright theft, but a more common danger is raiding the The ability of oil-and-gas-exporting economies to effectively use export revenues as catalysts for stronger funds to finance current expenditures without necessary checks and balances. Therefore, complete transparency economic growth and poverty reduction has been, at best, mixed. Several factors play a role: and clear rules guiding contributions and withdrawals are needed if the funds are to be a catalyst for long-term growth. Windfall profits and high export revenues in times of Given the potential benefits, an increasing number high oil prices damage prospects in other tradable sec- of oil exporters have created some form of oil fund, tors because of real exchange-rate appreciation: the particularly since the 1990s. This trend partly reflects the so-called Dutch disease. relatively recent firming of oil prices since 1998 and the Energy-based revenues are volatile and unpredictable. subsequent need to manage windfall revenues. Several Because government budgets depend heavily on the countries have adopted oil funds as part of a broader effort oil revenues, such volatility can easily lead to fiscal to reorganize and revitalize their hydrocarbon sectors and instability. to make the transition from centrally planned systems Energy resources will eventually become exhausted. (figure), and new oil exporters are emerging, for example The prospect does not create a natural investment Kazakhstan. climate for long-term sustainable development. Price of oil and the creation of oil funds in selected -can be managed countries, 1970-2003 Oil funds, delinked from the current budget and invested abroad, potentially help alleviate these problems. Further, #/bbl compared to the imbalances associated with petrodollar 50 Russia Oman - recycling during the 1970s, creation of oil funds suggests 45 Kazakhstan improvement in the management of oil rents. Delinking Algeria the volatile part of oil revenues from current budgets 35 Azerbaijan, contributes to fiscal stability. By investing oil revenues 30 Chad abroad, instead of spending them domestically, the hazards Colombia of exchange-rate appreciation can be mitigated in the 20L event of temporarily high oil prices. Long-term funds 15L Mexico may help prepare a country for the depletion of resources. 104 Norway Iran, balamle They are usually administered separately from other Hop. of government accounts, and without the protections of AL. B. de Venezuela adequate transparency, good governance, and institutional controls, these funds can be subject to the influence of 1970 1973 1976 1979 1902 1985 1989 1991 1994 1997 2000 2003 the politically powerful. At the extreme, this can mean Source: Davis 2001
