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- High oil prices have exacerbated the poor financial states of the national oil companies in some countries with price subsidies, leading to their inability to procure oil products on time, acute fuel shortages, and high black market prices.

- Fuel price subsidies have increased incentives for diversion to black markets and smuggling, pushing up domestic prices markedly above the official prices.

- Power shortages in a number of countries have increased demand for diesel for emergency power generation, causing diesel fuel shortages and higher diesel prices in some markets. Aside from chronic inefficiencies and financial trouble in a number of power markets, a growing cause of power shortage is declining rainfall that has reduced hydropower generation in East Africa and elsewhere. Diesel and fuel oil link the oil market to the power sector, with the pace of power sector reforms affecting oil demand and domestic oil product prices.

- Piracy in the Gulf of Aden and Indian Ocean has increased insurance costs, led to shipping delays, and at times has caused fuel shortages in East Africa.

- The challenges to the authorities mounted by citizens across the Middle East and North Africa since 2010 have stalled and sometimes reversed oil price reforms in several countries, against the backdrop of perceived declining state legitimacy.

This paper is a part of a larger study that examines, from the point of view of consumers, issues related to oil prices in the downstream oil sector and other sectors where oil is an important input. It does not consider macro-level policies (such as monetary or exchange rate policy) or the impact of oil price changes on the macroeconomic performance of countries, nor does it discuss management of windfall income by large oil exporters and the long-term economic consequences of revenue management. This paper pulls together the findings from two recent working papers in the same study (Kojima 2012, 2013), which had built on earlier publications (Bacon and Kojima 2006, 2008a, 2008b; Kojima 2009a, 2009b). It covers developments in recent years with a focus on developing countries and proposes a menu of options for drawing a roadmap for pricing policy reform for oil products. It takes events since 2009 and looks at how recent oil price movements have affected countries’ vulnerability to world oil price increases, how governments in developing countries have adjusted domestic fuel prices in response, the consequences of the policy responses, other coping mechanisms to deal with high oil prices and price volatility, the roadblocks to reforming pricing policy, and how to overcome the roadblocks. It complements recent publications and a Web-based database on this topic—such as IMF (2013a, 2013b); Vagliasindi (2013); Arze del Granado, Coady, and Gillingham (2012); numerous studies by the Global Subsidies Initiative (GSI); and the country factsheet section of the International Fuel Price page of Energypedia recently set up by the German development agency, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ)— by focusing particularly on the workings of the downstream oil sector.

Section 2 provides background on changes in the global oil market since the 1970s, how these changes have driven pricing policies in developed countries, and where many developing countries are in the evolution of pricing policies. Section 3 takes a brief look at vulnerability to changes in oil prices in recent years. Section 4 compares domestic oil product prices in a sample of developing countries four years apart, in January of 2009 and 2013, to examine the degree of pass-through of world price increases to the domestic market. Section 5 provides an overview of