Oil transition could fuel conflict, instability in vulnerable countries

The global shift away from oil could trigger migration, political instability and economic crises in vulnerable producer countries unless governments and international institutions act urgently, according to research by the E3G think tank.

Countries including Nigeria, Iran, Angola and Algeria are considered particularly exposed because their governments depend heavily on oil revenues while having limited economic diversification and insufficient financial reserves to absorb the impact of declining demand, The Guardian writes.

Global oil consumption is expected to plateau within the next decade, with demand likely to peak in the early 2030s. As the market shrinks, producers will compete for fewer buyers, with low-cost producers such as Saudi Arabia and the United Arab Emirates expected to be better positioned than countries with higher production costs and weaker infrastructure.

“Governments are not thinking about and not prepared for [these outcomes],” said Beth Walker, a co-author of the E3G report. “The transition becomes riskier for everyone when oil producers are left to adjust on their own, and oil markets left to manage themselves. Producer fragility becomes a global security risk.”

Fiscal pressure

Oil accounts for more than 40% of government revenue in 17 countries. In Iraq and Libya, it contributes between 70% and 90% of government income.

E3G forecasts that oil revenues could fall sharply after 2030, including an estimated 87% decline in Algeria and more than 60% in Nigeria. Algeria is considered particularly vulnerable because of its proximity to Europe and its heavy reliance on the European Union as an export market.

Falling revenues could make it harder for governments to provide basic services and manage debt. Angola and Mexico already spend more than a quarter of their government revenue servicing public debt, according to the research.

Walker warned that the consequences could take different forms across countries.

“This isn’t one dramatic global oil or security crisis, it’s a series of national fiscal crises that could turn into very different security problems: unrest and migration in Algeria; a much more brittle settlement in Iraq with spillover into Gulf regional stability; weaker state capacity in the most populated country in Africa, Nigeria, with spillovers across the continent; military competition over oil infrastructure in Libya with heightened security risk in Europe. Most of these problems are a much larger scale than Venezuela, and they could all unravel just as the UK and Europe’s capacity to contain live conflicts is drained.”

No case for delaying the transition

The researchers stressed that the risks do not justify slowing the move away from fossil fuels, as climate change is already intensifying.

“None of this is an argument for slowing the transition,” said Maria Pastukhova, a co-author of the report. “A slow but chaotic transition can be just as destabilising as a fast one, maybe even more so.”

E3G developed its findings over two years, including through exercises examining possible oil-demand scenarios with more than 100 public servants and experts.

Bob Ward of the Grantham Research Institute at the London School of Economics said high-cost producers would likely feel the effects first, including North Sea production.

International response needed

The report calls for coordinated action involving the International Monetary Fund, World Bank, governments and private financial institutions.

“Much of the toolkit already exists, but in separate policy boxes that need to work together,” Pastukhova said. “Major demand powers need to coordinate and communicate more clearly about their future demand. They need to produce adjustment not just as part of their development assistance or climate policy, but as part of their foreign and economic security policy, given the consequences that otherwise might follow.”

China, previously the main driver of global oil-demand growth, is already seeing consumption decline partly because of the rapid adoption of electric vehicles. India’s future oil demand remains less certain and could play an important role in determining how quickly global consumption falls.

By Sabina Mammadli