Since July 2014 the price of crude oil has fallen from above $100 per barrel to below $40. This drop has brought the risks facing oil exporters into stark relief. Nowhere more so than in Africa, where there are now questions about how viable the recent oil and gas discoveries in Kenya, Tanzania, and Uganda will be. At the same time, many other African nations, including Angola, Ghana, Nigeria, and Senegal, are seeing their newly established sovereign wealth funds tested for the first time. With the volatility of oil revenues clear in people’s minds, now is a good time to discuss how such funds can be used to stabilize oil revenues and share their benefits across generations. In particular, do sovereign wealth funds make sense for all oil exporters? If so, what should they look like, and how should they be used?
There are broadly three reasons why a resource-exporter might set up a sovereign wealth fund: intergenerational transfer, parking, and stabilization. The relevance of each will depend on the country’s level of development.