9 economic planning.<sup>7</sup> While shorter-term uncertainty, as estimated from the distribution of one-year futures prices, is less than that of the long-run price swings it is still very large. The standard deviation of a typical one-year futures price distribution is around 20% of the expected value and sometimes higher.<sup>8</sup> Uganda’s revenue is even more uncertain than suggested by these calculations, especially if oil taxes follow good practice and are designed to be progressive. Lack of clarity on policies and tax disputes have delayed the onset of commercial oil production and disagreements may recur in the future. The decision to build a refinery exposes the treasury to an additional risk -- political pressure to reduce domestic fuel prices that are currently very high because of the need to import fuel from the coast. Both options – pipeline and refinery—will require large upfront investments and servicing these will cut into the costprice margin for oil and so reduce rents. The lower quality of Uganda’s crude further squeezes the potential rent margin, and makes it more sensitive to market conditions than the margin for a low-cost high-quality crude producer like Saudi Arabia.

The boom-bust cycles induced by large price swings can be very damaging. A large body of evidence summarized in van der Ploeg 2011 and other studies suggests that a major part of the so-called “resource curse” can be attributed to the failure of producing governments to implement counter-cyclical policy in the face of large trade and revenue shocks. The effect of volatility is not independent of country characteristics such as the levels of export concentration, financial development and the quality of political institutions.<sup>9</sup> Improved capacity to manage shocks, a more robust financial sector, and efforts to encourage a more diversified economy are some of the ways in which resource-rich countries can work to minimize the curse. A few, like Chile, have succeeded in sustaining counter-cyclical policies using fiscal rules and transparent and independent projections of long-run resource prices to guide policy (de Gregorio and Labbe 2011), but even for these it has not been easy to resist the pressures to increase spending at

> 7 Oil prices have very high long-term volatility and hard mineral prices are not far behind.  Hamilton 2008 estimates the likely price band for oil prices up to four years into the future, assuming that the logarithm of prices follows a Gaussian random walk.  Starting from an initial price of $115 per barrel, the 95% confidence range for the four year distribution was between $34 and $391.  At the time, in the middle of the super-boom with prices spiking up to $140, no one could have imagined prices at the low end of the scale, but they collapsed to that level shortly after the publication of the study with the onset of the global crisis.  In addition, many of the new producers face high base production costs, further increasing the sensitivity of rent flows to market prices.

> 8 The IMF commodities outlook for December 17, 2013, puts the expected price for Brent Light Oil at $105 with a 95% confidence interval of [60, 150], corresponding to a coefficient of variation of about 25%. ehttp://www.imf.org/external/np/res/commod/pdf/cpor/2013/cpor1213.pdf

> 9  Van de Ploeg and Poelhekke 2010 show that adverse growth effects of natural resources results mainly from the volatility of commodity prices, especially for point-based resources.   Indeed, the indirect effects of resource exports on growth via the volatility channel outweigh a direct positive effect of resource endowments on growth.  Arezki, Hamilton and Kazimov 2011 find that overall government spending in resource-exporting countries has been procyclical relative to commodity prices and that in the long run resource windfalls have negative effects on the growth of non-resource GDP.  Both the effects of windfalls on macroeconomic stability and on growth are moderated by the quality of political institutions.