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This paper constructs a dynamic stochastic general equilibrium model which reflects the characteristics of African economies but is general enough to imbed both oil-producing and oil-importing countries. This model is used to quantify the impact of changes in oil prices on African economies. A rise to twice the current price level would lead to:

• a fall in output by 6% in the first year for the median oil-importing country given a complete pass through of the increase in prices to the consumers
• a 6% increase in the budget deficit for the same country opting for a no-pass through strategy to prevent a decline in output
• an increase in income by 4 % accompanied by a strong rise in inflation in the median oil-exporting country when applying a managed float exchange regime
• a 9 % increase in income accompanied by a sharp real appreciation for the same country applying a fixed exchange rate
  

Local currency pricing can cushion the adverse effects of oil price shocks in oil-importing countries, but amplifies the consumption loss and aggravates the budget deficit. It is the optimal choice for a government concerned with stabilising output while a free market is the welfare-maximising policy for a generous social planner. In oil-exporting countries, government intervention does not affect economic outcomes in a substantive way.

Foreign aid can help oil-importing countries cope with high oil prices as the inflow of foreign aid needed to prevent output losses is non-prohibitive.

However, there is a great deal of heterogeneity within the groups of oil-importing and oil-exporting countries. This is not addressed by the model. Also, the model does not address the effect of high oil prices on poverty which is of crucial importance in the African context.

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