The current wave of volatile international oil prices coupled with the low hydroenergy generation continues to exert negative impacts on the Ugandan economy. This paper analyses the extent to which changes in energy prices affect the economy and examines policy options that can be undertaken to circumvent the negative effects. The impact of higher oil prices takes a large toll on all sectors including agriculture, manufacturing and services. With the existing losses in productivity of generating hydro electricity, this has exacerbated the energy crisis. The combined output loss for the manufacturing sector due to increase in fuel prices and a shortage of electricity is estimated at 2 per cent on annual basis. While the government has little control on the international prices of oil, further private and public investments in the energy sector are called for to alleviate the shortages of energy.