Dealing with External Shocks Findings reports on ongoing operational, economic and sector work carried out by the World Bank and its member governments in the Africa Region. It is published periodically by the Africa Technical Department on behalf of the Region. Thus, a small oil price increase can have a large impact. Nigeria's reliance on oil production for income generation clearly has serious implications for its economic policy management. In resource-based economies, such as those dependent on oil, exports and government revenues are uncertain and highly volatile.
Uncertainty means that a variable, say, the oil price for the coming years, is simply unpredictable.
Volatility means that even if another variable, such as oil production, changes from year to year, its level is still predictable. Uncertainty of revenues can be addressed by using hedging instruments which, for a fee, provide insurance against an expected price fluctuations. Such hedging may allow a country to forecast the oil revenue it would receive, say, next year. But it may not reduce the volatility of revenue, because the prices of these instruments are also volatile. This volatility can, however, be managed by an oil stabilization fund, which complements the hedging.