The floating production storage and unloading vessel Egina, the largest of its kind in Nigeria, is moored in the port of Lagos 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 by the risk consultancy Verisk Maplecroft.
In its 2021 Political Risk Perspective, published on Thursday, Verisk cautioned that countries that have failed to diversify their economies, moving away from fossil fuel exports, have faced a “wave of slow-moving political instability”.
With the shift away from fossil fuels to accelerate over the next three to 20 years, and the Covid-19 pandemic eroding short-term gains in oil export revenues in recent years, Verisk warned that oil-dependent countries are failing to adapt risk of sudden changes in credit risk, policy and regulation.
Although some countries are increasing investment in fossil fuels in the short term, consensus estimates indicate that the “peak of oil” will be reached in 2030, after which the transition to a low carbon economy will gain strength and will force countries producing oil to adapt their revenue streams.
Analysts suggested that the hardest hit countries could enter “cycles of destroying ever-decreasing hydrocarbon revenues, political turmoil and failed attempts to revive non-oil sectors.”
Since the fall in oil prices in 2014, most exporters have stagnated or reversed efforts to diversify their economies, the Verisk data pointed out, with many doubling production in the years to come in an attempt to plug revenue holes.
“Despite this, most have suffered a blow to their foreign exchange reserves in any way, including Saudi Arabia, which has consumed almost half of its 2014 dollar stock,” added the report.
Balancing costs, the ability to diversify and political resilience have been identified as the three key factors that determine the severity of the impact on stability when the expected energy transition begins to emerge.
“Currently, if countries’ external breakeven points – the oil prices they need to pay for their imports – remain above what markets can offer, they have limited choices: attracting foreign exchange reserves like Saudi Arabia since 2014 , or devalue its currency like Nigeria or Iraq in 2020, effectively rebalancing its imports and exports at the expense of living standards, “explained the report.
Nigeria, Africa’s largest economy, depends on crude oil sales for around 90% of its foreign currency earnings and has devalued its naira currency twice since March last year. The IMF last month urged the country’s central bank to devalue once again, but met with resistance.
The Verisk researchers suggested that the recent devaluations of the currency were a “harbinger of the gloomy options” that oil-producing countries will face, which will have to diversify or face forced economic adjustments.
“Many, if not most, of the net oil producers will struggle with diversification largely because they lack the necessary economic and legal institutions, infrastructure and human capital,” said Verisk head of market risk, James Lockhart Smith.
“Even when these institutions are in place, the political environment, the challenges of corruption or governance and entrenched interests mean that some cannot reform their way out of trouble, even when it is the rational way.”
The most vulnerable countries are high-cost producers who rely heavily on oil for revenue, have less capacity for diversification and are less politically stable, said Verisk, identifying Nigeria, Algeria, Chad and Iraq as the first to be hit. “if the storm breaks” due to its fixed or rising exchange rates.
Lower-cost Gulf producers with stronger economic institutions and resources that allow for easier diversification, such as the United Arab Emirates and Qatar, were seen as the least susceptible to political upheavals. However, Lockhart Smith has suggested that even they will not come out unscathed.
“Authoritarian political stability is anything but stable in the long run, and as lower oil prices cut social spending longer, additional pressure will build up on these seemingly fragile political systems,” he said.
“Even diversification can come with its own political risks, by challenging traditional petro-state social contracts: legitimacy to govern in exchange for the generosity of hydrocarbons.”