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Volatility in oil prices is a reflection of the common characteristic of the commodity-oil. This is linked to a high uncertainty associated with resource development, and the high specificity of ...
Volatility in oil prices is a reflection of the common characteristic of the commodity-oil. This is linked to a high uncertainty associated with resource development, and the high specificity of investment along the entire energy value chain. Oil price volatility has become a recurring dilemma in an energy market mired in cyclical trends of pricing shocks. The International Energy Agency (IEA) in its World Energy Outlook 2008 predicted an increasing demand at the rate of 1.6%/y on average between 2006 and 2030. As a result, issues of fiscal terms re-negotiations and rent-seeking will shape the relationship between producing countries and investor companies. A major corollary of this instability in oil prices is a renewed battle for rent between host governments and investors. This in effect would engender a shift in balance of the applicable petroleum fiscal regimes.
The challenge of a fiscal policy in a volatile price oil era is ensuring a high share of value is secured for the Government. At the same time, the fiscal policy strives to encourage the exploration of these valuable resources without harming the commercial interest of the oil companies. Price volatility fundamentally alters the sharing formula; it is therefore imperative for a correct balance to be achieved between the competing state interests and the oil companies. The question becomes how equilibrium can be achieved in a petroleum fiscal system design, which guarantees suitable government take and avoids the negative effect of instability and re-negotiation of fiscal terms.
The objective of this paper is to analyse the options available to resource countries in securing appropriate economic rent and safeguard the interest of the investors in the face of pricing volatility. The paper will adopt both analytical and descriptive approaches in articulating these issues.