EURASIA AND CENTRAL ASIA REPORTS Creating a Favourable Deployment Mechanism of Oil and Gas Revenues with Regard to Volatile Oil Prices: The Case of Azerbaijan Ilkin M. Sabiroglu • Samad Bashirli • Faiq Qasimli Received: 23 May 2010 / Accepted: 15 December 2010 / Published online: 24 February 2011 Ó Springer-Verlag 2011 Abstract This paper studies optimal mechanisms of intergenerational fair distribution of oil and gas revenues in terms of oil price shocks in the case of Azerbaijan. In order to determine optimal utilization mechanism of oil and gas revenues the following models: real constant expenditure (permanent income hypothesis), nominal constant expenditure, stable diminishing expenditure and stable rate diminishing expenditure, were tested on the basis of three alternative oil and gas export prices. Finally the research suggests the statistical method to calculate crude oil reference price for the midterm fiscal planning and the flexible mechanism which can be revised with regard to oil price uncertainty. Keywords Sustainable fiscal policy  Permanent income hypothesis  Oil price uncertainty  Oil reference price  Azerbaijan JEL Classification E6  H5  Q3  D81 Introduction There are many channels through which natural resource revenues can negatively affect a national economy. The linkage between deterioration of terms of trade and I. M. Sabiroglu (&) Faculty of Economic and Administrative Sciences, Qafqaz University, Baku, Azerbaijan e-mail: ilkinsabiroglu@gmail.com S. Bashirli Department of Strategic Planning of Economic Development, Ministry of Economic Development of the Republic of Azerbaijan, Baku, Azerbaijan e-mail: samedazer@yahoo.com F. Qasimli Strategic Analysis Division, Ministry of Economic Development of the Republic of Azerbaijan, Baku, Azerbaijan e-mail: faiqasim@yahoo.com 123 Transit Stud Rev (2011) 18:179–199 DOI 10.1007/s11300-011-0183-5