Working Paper 242 - Understanding the prospective local content in the petroleum sector; and the potential impact of high energy prices on production sectors and household welfare in Uganda

The objective of this study is: (a) understand the prospective local content of the petroleum (energy) sector based on its current linkage structure and (b) to understand the potential impact of energy prices on various sectors and on welfare of various household groups. The analysis is based on fixed price social accounting framework models. The results indicate that local content is lacking and the petroleum sector is considered weak in terms of backward and forward linkages. This suggests that the upstream and downstream sectors of petroleum industry are not well established which might undermine the prospective opportunities to maximize benefits from anticipated oil production. The government’s interest in policies that could establish local content in the potential supplying and consuming industries is highly justified. The results also show that the potential impact of high energy (crude oil) prices on sectoral production costs, and consumption prices is negative but modest. The overall cost of living of households’ increases by a maximum of 3.7 percent. There is a spatial dimension in terms of impact as the brunt of energy price shock is larger for the rural household (rural nonfarm and rural farm) compared to the urban households (urban farm and urban nonfarm). Additionally, the induced effects of the energy price increase on the household groups tend to dominate meaning that the households are more highly affected by price feedbacks from consuming goods from energy intensive sectors than their direct energy consumption. In view of the foregoing, a well-designed and targeted energy policy to counteract the potential negative direct and indirect impact of higher energy prices on the vulnerable household groups is urgently needed.