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IEA report catalogues risks faced by countries dependent on crude
Alan Bailey Petroleum News
A new report, published by the International Energy Agency and titled “Outlook for Producer Economies 2018,” examines the challenges faced by countries with economies dependent on oil production and makes recommendations for how those countries may respond to those challenges. The report comments on how the rollercoaster ride of oil prices in recent years has exposed the structural weaknesses in the economies of many of the major oil producers. And the report recommends that these countries reform their economies, maintaining their hydrocarbon industries while also finding ways of extracting value from hydrocarbon products and diversifying into areas such as natural gas production, renewable energy and the deployment of new technologies such as carbon capture and storage.
In other words, the report suggests that these economies would remain centered on energy but would use energy as a means of diversification and of maintaining a comparative advantage for certain types of economic activity.
Focus on six countries The report focuses particularly on the economies of Iraq, Nigeria, Russia, Saudi Arabia, the United Arab Emirates and Venezuela, countries that are net exporters of oil and where oil exports account for a high proportion of total exports and of fiscal revenues.
The report says that the evolving energy scene places sustained pressure on these countries, with the shale oil revolution in the United States upending the traditional oil market, a strong international drive for improved energy efficiency and the specter of a long-term response to climate change. At the same time, the extreme recent volatility in the price of oil has brought to light the structural weaknesses of the oil dependent economies: Major swings in the price of oil tend to destabilize economies that are not resilient to the ups and downs of the price.
Several scenarios The report examines the possible outcomes of different future energy scenarios.
In one scenario current national policies continue, within the context of the continued evolution of known technologies and continuing rising demand for oil and gas, as overall energy demand increases. Under this scenario, the use of renewable energy, particularly wind and solar grows rapidly and becomes the cheapest source of new power generation in many countries. But, with that growing energy demand, the equilibrium price of oil and gas will also likely increase.
Even in this apparently benign environment for oil and gas production, economic reform is necessary, given the risk of market volatility, long-term government policy uncertainty and, in some countries, the need to create employment opportunities for growing, youthful populations, the report says.
Moreover, in a future scenario where oil prices remain relatively low, perhaps settling in a $60 to $70 per barrel range, the risks to these oil dependent economies multiply, the report suggests. In this situation, without reform, there would be a cumulative major loss in revenues, leading to current account deficits, downward pressure on currencies and lower government spending. That in turn would lead to a drop in personal disposable income.
In another possible future scenario stronger government policies requiring better fuel efficiency and fuel switching, with a rapid growth in electrically powered transportation, there would be an earlier peak in oil demand, while natural gas usage might also be curtailed. In this situation, although hydrocarbon related revenues through to 2040 might prove similar to those in a low oil price scenario, the change in energy sourcing would demand economic diversification in hitherto oil export dependent states.
Hydrocarbon investment remains vital On the other hand, it remains vital that oil producing nations maintain appropriate investment in their hydrocarbon industries, given that that oil and gas represent for them a low-cost resource base. The report cites the examples of Nigeria and Venezuela, where investment in upstream oil and gas has run into problems, with serious economic consequences. In Venezuela, in particular, where there are few signs of any macroeconomic or policy changes that might arrest the oil production decline, production has fallen by half since 2016, the report says.
And, while periods of relatively high oil prices may bring temporary relief to oil dependent countries, these periods also reduce the incentives for these economies to reform while, at the same time, encouraging policies elsewhere to reduce oil and gas dependency. The likely outcome is that prices will fall again.
The report particularly cites the Middle East, where the climate offers the opportunity to use solar energy in concert with policies for reducing oil and gas consumption. Also in the Middle East, an increased emphasis on refining and petrochemical production could generate new revenue streams while providing a hedge against reduced global demand for oil for transportation. Oil and gas producing countries could also play leading roles in new arenas, such as carbon capture, utilization and storage, and the supply of hydrogen, the report suggests.
Change is inevitable The report says that at this point in history fundamental changes to the economic development concepts for hydrocarbon resource-rich countries appear inevitable. But change will be complex and challenging. Inaction or the failure to reduce dependence on hydrocarbon revenues would increase the risks faced by the hydrocarbon producing nations and the global energy market.
On the other hand, successful reform would have multiple implications for that market and for efforts to reach global environmental goals, the report says. For example, reducing the dependence on oil revenues for services such as health care and education could reduce the oil price level at which oil producing countries remain solvent - in that case low-cost producers could viably capture a larger share of the oil market. The resulting lower equilibrium oil price could then trigger environmental policy responses, designed, for example, to encourage electric car use.
- ALAN BAILEY
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