# 1- Strong fluctuations in world oil prices, with a sharp upward trend in recent decades

World oil prices have experienced highly volatile fluctuations, with a strong upward trend in recent decades. Between September 2003 and June 2008, oil prices soared fourfold, before dropping drastically, followed by a further rise in late 2008. Oil prices fell again drastically between June 2014 and May 2020, from US$105 to US$31 a barrel. The upturn in 2021 was exacerbated in Q1 2022, mainly due to the war in Ukraine, reaching a peak of US$114 a barrel in July 2022. The overall trend was downward in 2023, fluctuating around US$80.5 a barrel. The literature identifies some key determinants of sharp fluctuations in world oil prices. These include strong variations in production levels  often associated with geopolitical events, the discovery of new oilfields, or improvements in extraction and production technologies. They can also be related to demand shocks due to the worldwide economic cycle, as expansion periods in the global economy can be associated with increased oil demand to meet energy needs. Oil price expectations or speculative behavior also plays a key role in shaping the actual price. For instance, if countries anticipate a future rise in price, they may incorporate these expectations into their decisions right now, for example by stockpiling oil for future use, thus creating an imbalance between supply and demand on the world market. Moreover, by fueling expectations of future price rises, the highly volatile fluctuations in the world oil market can drive an inflationary spiral through higher wage demands.

Rising oil prices worsen household living standards and increase production costs, with greater effects on the poorest. The increase in oil prices directly affects households, by raising fuel prices for daily needs such as cooking, lighting, transport, and heating. In addition, indirect effects result from higher production costs for firms, leading them to raise their prices, thus resulting in higher inflation. In the absence of a subsidy program, or if household wages are not indexed to price rises, the latter are subject to a loss in purchasing power. This leads to a drop in consumption, a reduction in savings to maintain their standard of living, or budget reallocation at the expense of human and physical capital accumulation. The latter impact is particularly true for the poorest households, generally with low precautionary savings and the least able to absorb the social cost of price rises, which exacerbates household poverty and vulnerability.

In response to rising oil prices since 2003, many governments introduced fuel subsidies to protect households, especially the most vulnerable. Explicit global fuel subsidies have risen steadily in recent years. According to the an IMF report by Black et al. (2023), total fossil fuel subsidies rose from 5.4 percent of GDP in 2015 to 7.1 percent of GDP in 2022. Implicit subsidies, such as under-invoicing of environmental costs and uncollected consumption taxes, account for 82 percent of the total, while explicit subsidies (under-invoicing of supply costs) account for 18 percent. Fuel subsidies remain high in many countries, with the República Bolivariana de Venezuela topping the list between 2015 and 2022, averaging 38 percent of GDP, followed by Ukraine (30 percent of GDP) and the Kyrgyz Republic (around 25 percent of GDP). The removal of fuel subsidy programs initiated by some governments has been hampered by the COVID-19 pandemic and the war in Ukraine. For instance, since 2018, the Ukrainian government has implemented a series of reforms leading to the removal of many subsidies, while implementing targeted consumer support programs. However, fossil fuel subsidies have recently increased, in response to the COVID-19 crisis, rising from US$37.97 billion in 2020 to US$45.68 billion in 2021, before decreasing to US$32.67 billion in 2022. Fossil fuel subsidies remain high in Ukraine, accounting for 34.83 percent of GDP in 2022, in part due to a denominator effect, since the GDP of Ukraine shrunk in 2022 because of the war.

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