The floating production storage and unloading vessel Aegina, the largest of its kind in Nigeria, is docked at 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 experience political instability as oil producers feel the effects of a transition to low-carbon energy production, according to a new report from the risk consultancy Verisk Maplecroft.
In its 2021 political risk outlook, released on Thursday, Verisk warned that countries that had failed to diversify their economies away from fossil fuel exports were facing a “wave of slow-moving political instability.”
With the fossil fuel section accelerating in the next three to 20 years, and the Covid-19 pandemic gaining short-term gains in oil export earnings in recent years, Verisk warned that oil-dependent countries do not adapt to risks of strong changes in credit risk, policy and regulation.
While some countries are increasing investment in fossil fuels in the short term, consensual estimates indicate that the “peak oil peak” will be reached in 2030, after which the transition to a low-carbon economy will bring together steam and force oil-producing countries to adapt their revenue streams.
Analysts suggested that the hardest hit countries could enter “negative outflows of oil revenues, political turmoil and failed attempts to reactivate non-oil sectors.”
Since the fall in oil prices in 2014, most exporters have stalled or reversed efforts to diversify their economies, Verisk data highlighted, and many doubled production in the following years in an attempt to cover up. the revenue holes.
“Despite this, most received success in their foreign exchange reserves anyway, including Saudi Arabia, which has burned almost half of its 2014 dollar reserve,” the report added.
Equilibrium costs, the ability to diversify, and political resilience were identified as the three key factors that determine the severity of the impact on stability when the expected energy transition begins to sting.
“Currently, if countries’ external yields (the oil prices they have to pay for their imports) remain above what markets can offer, they have limited options: to take out foreign exchange reserves like Saudi Arabia since 2014 or devalue their currency like Nigeria or Iraq in 2020, effectively rebalancing their imports and exports at the expense of living standards, ”the report explained.
Nigeria, Africa’s largest economy, depends on crude oil sales for about 90% of its foreign exchange 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.
Verisk researchers suggested that recent currency devaluations were a “harbinger of bleak options” for oil-producing countries, 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 do not have the necessary economic and legal institutions, infrastructure and human capital,” said James Lockhart Smith, head of market risk for Verisk.
“Even when these institutions exist, the political environment, corruption or governance challenges and established interests mean that some may not reform their way out of trouble, even when it is the rational course.”
The most vulnerable countries are higher-cost producers who depend heavily on oil for income, have less diversification capacity, and are less politically stable, said Verisk, who identified Nigeria, Algeria, Chad and Iraq as the former affected “if the storm” due to their fixed or creeping exchange rates.
Low-cost Gulf producers with stronger economic institutions and resources that allow for easier diversification, such as the United Arab Emirates and Qatar, were considered less susceptible to political upheaval. However, Lockhart Smith suggested that they would not even come out unscathed.
“Authoritarian political stability is anything but stable in the long run, and as lower and longer oil prices fall into social spending, more pressure will be put on these deceptively fragile political systems,” he said.
“Even diversification could carry its own political risks by challenging traditional petro-state social contracts: legitimacy to govern in exchange for the generosity of hydrocarbons.”