Countries failing to diversify their economies away from reliance on exporting fossil fuels will become increasingly vulnerable to a “slow- motion wave of political instability" as the energy transition takes hold, according to a report by risk consultancy Verisk Maplecroft.
With the move away from fossil fuels accelerating and Covid-19 levelling out any gains oil made over recent years, the company's 2021 Political Risk Outlook picked out Algeria, Iraq, Nigeria, Angola, Gabon, and Kazakhstan among the countries heading for trouble unless they start adapting to transition toward a low carbon global economy
Data collated by Verisk Maplecroft showed some such countries increasing their reliance on fossil fuel exports and drawing heavily on their foreign currency reserves in the years between the 2014 oil price crash and the Covid pandemic.
Countries failing to adapt to energy transition could face increased credit risk and regulatory volatility as they enter a downward spiral of shrinking hydrocarbon revenues, political turmoil, and failed attempts to revive flatlining non-oil sectors, the report warned.
With mid-century price forecasts ranging ranging from $48 and $95 per barrel - reflecting uncertainty over energy transition—even the lowest-cost Gulf countries could run into these problems, the report said.
Exporters’ attempts to respond to the revenue gaps by “doubling down” on production have not prevented a dramatic fall off in foreign exchange reserves, the report noted, citing Saudi Arabia, which has burned its way through almost half of its 2014 dollar stockpile.
The report, which described energy transition as a "political risk nightmare" for oil-dependent states, also warned that diversification away from oil is not easy, with Norway hard to emulate and Oman and Qatar achieving only a qualified success.
“If, when, and how severely the storm hits each country will depend on three key factors: break-even costs, the capacity to diversify, and political resilience," the report stated.
Verisk Maplecroft mapped out an index of dependence on high oil prices and relative difficulty in achieving diversification, with Libya, Nigeria and Iraq faring worst, and Venezuela also facing enormous obstacles to diversification.
“Currently, if countries’ external break-evens—the oil prices they need to pay for their imports—remain above what markets can offer, they have limited choices: draw down foreign exchange reserves…or devalue their currencies… effectively rebalancing their imports and exports at the expense of living standards,” the report stated.
Verisk Maplecroft said recent devaluations in Nigeria and Iraq are a harbinger of tough choices ahead for oil producers, with forced economic adjustments the usual alternative to a failure to diversify.
The most vulnerable are the higher-cost producers with substantial dependence on oil revenues, little capacity to diversify, and higher levels of political instability.
"If a storm breaks, it will break first in Algeria, Nigeria, Chad, and Iraq, " cautions Verisk Maplecroft.
Azerbaijan and West African producers Angola, Gabon, Congo, Cameroon, and Equatorial Guinea, were identified as next in line for trouble as energy transition proceeds.
"Many, if not a majority, of net oil producers are going to struggle with diversification largely because they lack the economic and legal institutions, infrastructure, and human capital needed," said Verisk Maplecroft's head of mnarket risk, James Lockhart Smith.
“Problems are compounded by high break-even costs, fragile autocratic or semi-autocratic political systems, and restrictive foreign exchange regimes that lay them more open to abrupt devaluations,” the report stated.
The political risk outlook flagged the United Arab Emirates, Qatar and, to a lesser extent, Saudi Arabia and Kuwait, as oil exporters, with better stability, stronger economic institutions and resources that make them better able to diversify.