The floating production storage and unloading vessel Aegina, the largest of its kind in Nigeria, is berthed 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 face political instability as oil producers feel the effects of a transition to low-carbon energy production, according to a new report from risk consultancy Verisk Maplecroft.
In its 2021 political risk outlook, published on Thursday, Verisk warned that countries that had failed to diversify their economies outside of fossil fuel exports were facing a “slow-moving wave of political instability.”
With the removal of fossil fuels set to accelerate in the next three to 20 years, and the Covid-19 pandemic gaining short-term gains from oil export earnings in recent years, Verisk has warned that oil-dependent countries it does not adapt to risky changes in credit, policy and regulatory risk.
Although some countries are increasing their investment in fossil fuels in the short term, consensual estimates indicate that the “peak oil” will be reached in 2030, after which the transition to a low-carbon economy will accumulate steam and force oil-producing countries to adjust revenue streams.
Analysts have suggested that the worst-hit countries could enter “dangerous loops to reduce oil revenues, political unrest and failed attempts to revive the non-oil sectors flat.”
Since the fall in oil prices in 2014, most exporters have stagnated or reversed efforts to diversify their economies, Verisk data said, with many doubling production in the coming years in an attempt to cover revenue gaps.
“Despite this, most have had an impact on foreign exchange reserves anyway, including Saudi Arabia, which has burned nearly half of its dollar stock since 2014,” the report added.
Equilibrium costs, diversification capacity 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 differences – the oil prices they have to pay for their imports – remain above what markets can offer, they have limited options: withdraw foreign exchange reserves such as Saudi Arabia from 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 explained.
Nigeria, Africa’s largest economy, relies on crude sales for about 90 percent of its foreign exchange earnings and has devalued its naira currency twice since March last year. The IMF last month called on the country’s central bank to devalue once again, but met with resistance.
Verisk researchers have suggested that recent currency devaluations have been a “harbinger of the gloomy options ahead” for oil-producing countries, which will either have to diversify or face forced economic adjustments.
“Many, if not a majority, 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 chief market manager James Lockhart Smith.
“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 the course is rational.”
The most vulnerable countries are higher-cost producers, who are heavily dependent on oil for income, have less capacity to diversify and are less politically stable, Verisk said, identifying Nigeria, Algeria, Chad and Iraq. as the first affected “if the storm breaks” due to fixed or fast access exchange rates.
Low-cost Gulf producers with stronger economic institutions and resources for easier diversification, such as the UAE and Qatar, were seen as the least susceptible to political upheaval. However, Lockhart Smith suggested that even they would not go unharmed.
“Authoritarian political stability is anything but long-term stable, and as lower and longer oil prices fall in social spending, additional pressure will build up on these deceptively fragile political systems,” he said.
“Even diversification could come with its own political risks by challenging traditional petro-state social contracts: the legitimacy to govern in exchange for the breadth of hydrocarbons.”