Oil countries tipped for political instability if fossil fuels were to be abandoned

The floating production, storage and unloading vessel Aegina, the largest of its kind in Nigeria, is moored in the port of Lagos on 23 February 2017.

Stefan Heunis | AFP | Getty images

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

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

With fossil fuels gaining momentum over the next three to 20 years, and the Covid-19 pandemic in recent years weakening short-term gains in oil export earnings, Verisk warned that oil-dependent countries are not adapting risk sharp changes in credit risk, policies and regulations.

While some countries are increasing investment 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 pick up steam and force oil-producing countries to adjust their revenue streams. .

Analysts suggested the hardest hit countries could find themselves in “doom circles of shrinking hydrocarbon revenues, political unrest and failed attempts to revive the non-oil sectors.”

Since the oil price crash of 2014, most exporters have stagnated or reversed their efforts to diversify their economies, Verisk data highlighted, with many doubling production in the following years in an effort to close revenue gaps.

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

Break-even costs, the ability to diversify and political resilience were identified as the three key factors determining the severity of the impact on stability when the expected energy transition begins to falter.

Currently, if countries’ external break-evens – the oil prices they have to pay for their imports – remain above what the markets can offer – they have limited choices: take up foreign exchange reserves like Saudi Arabia since 2014, or devalue their currencies like Nigeria or Iraq in 2020, effectively rebalancing their imports and exports at the expense of living standards, ”the report said.

Nigeria, Africa’s largest economy, relies on crude oil sales for about 90% of its foreign exchange earnings and has devalued its naira currency twice since last March. The IMF last month urged the country’s central bank to devalue once again, but met with resistance.

Verisk researchers suggested that recent currency devaluations have “foreshadowed the bleak options” for oil-producing countries, which will either have to diversify or face forced economic adjustments.

“Many, if not the majority, of net oil producers will struggle with diversification, largely because they lack the economic and legal institutions, infrastructure and human capital,” said Verisk Head of Market Risk James Lockhart Smith.

“Even when such institutions are in place, the political environment, the challenges of corruption or governance and deep-seated interests mean that some may not reform their way out of trouble, even if it is the rational course.”

The most vulnerable countries are producers with higher costs, who rely heavily on oil for their revenues, have less diversification power and are less politically stable, said Verisk, who will hit Nigeria, Algeria, Chad and Iraq first “when the storm breaks”. because of their fixed or creeping exchange rates.

Cheaper Gulf producers with stronger economic institutions and resources that allow for easier diversification, such as the UAE and Qatar, were considered the least prone to political unrest. However, Lockhart Smith suggested that even they won’t emerge unharmed.

“Authoritarian political stability is anything but stable in the long run and as oil prices weigh on social spending for a longer period of time, there will be additional pressure on these deceptively fragile political systems,” he said.

“Even diversification can carry its own political risks by challenging the petrostate’s traditional social contracts: legitimacy to rule in exchange for hydrocarbon generosity.”