Oil-producing countries fall into political instability if fossil fuels are ditched

The floating production storage and offloading vessel Egina, the largest of its kind in Nigeria, is moored in Lagos Port on February 23, 2017.

Stefan Heunis | AFP | Getty Images

LONDON – Algeria, Chad, Iraq and Nigeria will be among the first countries to experience political instability as oil producers feel the effects of a transition to low-carbon energy production, according to a new report from risk consulting firm Verisk Maplecroft.

In its Political Risk Outlook 2021, released Thursday, the firm warned that countries that had failed to diversify their economies away from fossil fuel exports were facing a “slow wave of political instability.”

As the shift from fossil fuels is expected to accelerate over the next three to 20 years, and the Covid-19 pandemic eats away at the near-term gains in oil export revenues made in recent years, Maplecroft has warned that oil-dependent countries fail to adapt. risk of sudden changes in credit risk, policy and regulation.

Although some countries are increasing investments in fossil fuels in the short term, consensus estimates indicate that ‘peak oil’ will be reached in 2030, after which the transition to a low-carbon economy will accelerate and force countries oil producers to adjust their income streams. .

Analysts have suggested that the countries most affected could enter “into disastrous loops of declining oil revenues, political turmoil and unsuccessful attempts to revive the stagnation of non-oil sectors.”

Since the 2014 oil price collapse, most exporters have stalled or canceled efforts to diversify their economies, Maplecroft data pointed out, many of which doubled production in the years that followed in an attempt to fill income gaps.

“Despite this, the majority took a hit on their foreign exchange reserves anyway, including Saudi Arabia, which burned almost half of its stock of 2014 dollars,” the report added.

The breakeven point, the capacity for diversification and political resilience have been identified as the three key factors determining the severity of the impact on stability when the expected energy transition begins to bite.

Currently, if countries’ external breakeven points – the prices of the oil they need to pay for their imports – remain above what markets can offer, they have limited choices: reduce foreign exchange reserves like Saudi Arabia since 2014, or devalue their currency like Nigeria or Iraq in 2020, effectively rebalancing their imports and exports to the detriment of living standards, ”the report explains.

Nigeria, Africa’s largest economy, relies on crude sales for around 90% of its foreign exchange earnings and has devalued its naira twice since March last year. Last month, the IMF urged the country’s central bank to devalue again, but encountered resistance.

Researchers at Verisk Maplecroft suggested that the recent currency devaluations were a “harbinger of dark options” ahead for oil-producing countries, which will either have to diversify or face forced economic adjustments.

“Many, if not the majority, of net oil producers are going to find it difficult to diversify in large part because they lack the necessary economic and legal institutions, infrastructure and human capital,” said James Lockhart Smith, responsible for market risks.

“Even when such institutions are in place, the political environment, corruption or governance challenges and entrenched interests mean that some may not reform their way out of trouble, even where it is the rational path. “

The most vulnerable countries are higher cost producers who depend heavily on oil for their income, have less capacity for diversification and are less politically stable, according to the report, identifying Nigeria, Algeria, Chad and the United States. Iraq as the first to be affected. storm “because of their fixed or creeping exchange rates.

Low-cost Gulf producers with stronger economic institutions and resources allowing for easier diversification, such as the United Arab Emirates and Qatar, were seen as the least vulnerable to political upheaval. However, Lockhart Smith suggested that even they would not come out unscathed.

“Authoritarian political stability is anything but stable over the long term, and as lower oil prices for longer reduce social spending, additional pressure will build up on these deceptively fragile political systems,” he said. he declared.

“Even diversification could come with its own political risks by calling into question traditional petro-state social contracts: the legitimacy of governing in exchange for hydrocarbon largesse.”

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