Sunset on the Horizon for Petrostates

Petrostates — governments that largely depend on oil revenues to sustain themselves — could be in their twilight, Chris Miller wrote recently for Foreign Policy. The Covid-19 coronavirus global epidemic has seen oildemand tailspin. Russia’s rejection of OPEC+ demands to stifle production has also helped drive the price of crude down even further. Consequently, the short-term future for petrostates is bleak and their longterm prospects aren’t much better.

A Preview of What’s to Come

Coronavirus has illustrated the fragility of states relying too much on oil exports to fuel their economies. It may be a preview of another crisis on the horizon: clean energy. While countries like Saudi Arabia and Russia have accumulated vast wealth reserves to sustain themselves and invest in new technologies and industries, smaller producers will experience an entire economic collapse if they fail to fill the upcoming GDP void. 

Bloomberg New Energy Finance (BNEF) research organisation anticipates oil demand will begin to slow within five years before peaking in 2030. Fuel efficient cars and green energy policies will continue to reduce the world’s reliance on petrol. The forecast contradicts oil producer hopes that demand will continue to grow until 2050. 

The Paris Climate Agreement set the spark to phase out carbon emissions as it underscored the urgency of immediate action. However, it is dependent upon governments to enact policies that foster green energy growth. Some have been more proactive than others. Last year, Iceland passed a ban on registering new gasoline and diesel vehicles. Effective in 2030, all cars in the country must be electric.

Fifteen other states have instituted or discussed similar bans including France, the United Kingdom, and China.

China is also leading the world on clean energy investment. For 9 of the past 10 years, Beijing has topped every other nation in terms of investing in clean energy. It makes the most solar panels, wind turbines, batteries, and electric cars, according to TIME. China dwarfs other nations in oil imports at $239.2 billion in 2018 and is a steady customer for Middle East producers, but it is working quickly to change that.

A Damning Forecast

Although the International Energy Agency warned the transition to green energy is not happening fast enough, its concerns center more on staving off CO2 production, which it anticipates will continue to rise under current policies across the globe. Oil demand will still flatline, however, the IEA predicts. 

“Aggregate fossil fuel production falls precipitously by 2040 … Natural gas output rises by around 8% to 2030 before falling below today’s levels in 2040. Oil production peaks in the next few years and drops to 65 million barrels per day as the shift to alternative modes in the transport sector takes away its main demand base,” an IEA report said.

Petrostates: Between a Rock and a Hard Place

So where does this leave petrostates? Without vast cash reserves, they will continue to cut budgets as they are left struggling to find new sources of revenue. In many states, this will either lead to political problems or exacerbate those already there. Protests and mass migration may well become the theme in the coming decades as oil-dependent economies crumble.

In Nigeria, the government faces a political crisis that complicates its problem. As the price of oil continues to free fall, the government has imposed emergency measures to reduce the national budget. That will do little to help with the rise of clean energy, however, and technological revolutions seldom transpire during times of political upheaval. 

Algeria is also enduring protests as Prime Minister Abdelaziz Djerad warned of a “multi-dimensional crisis” for which the state is unprepared. The situation in Kazakhstan mirror Algeria as the government suppresses discontent among its people and cuts spending. Leaders like Kazakhstan President Kassym-Jomart Tokayev have already discovered the difficulty of maintaining power in a failed economy. 

Upcoming Currency Collapses

As oil is traded with the petrodollar, most states dependent on it have their currencies linked to the American dollar. Thus far, the Algerian, Nigerian, and Kazakhstan currencies are still stable with it, but that could soon change. Devaluing their currencies, like Oman is rumored to be considering, is perhaps inevitable at this point.

While the Covid-19 crisis is temporary, climate change and resulting shifts in energy production are here to stay. A currency devaluation would spell doom for many nations depending on oil. Look no further than Venezuela for an example of what the future holds for states when they encounter mass inflation.

Iran is another example of what happens when a state can’t sell oil. The nation, encumbered by new US sanctions, has witnessed the bottom fall out of its economy and protests against its leadership. 

While the sunset for oil demand is still decades in the future, investment in new industries will require immediate action to develop. Unfortunately, those states hurt the hardest are in unfavorable positions to pivot their economies as a result.