World’s Biggest Petro-States Face ‘Sustained Pressure’ to Diversify Economies, Cut Fossil Subsidies
The countries that depend most heavily on oil and natural gas revenues and exports will face “sustained pressure” to diversify their economies and cut back on fossil fuel subsidies due to the rise of shale oil and gas in the United States, improvements in energy efficiency, and the response to climate change, the International Energy Agency concludes in a report released last month.
The report focuses mainly on six countries where fossil production accounts for 40% to 90% of exports and government revenue, whose “somewhat precarious position has been exposed by low oil prices since 2014,” Carbon Brief reports. “This has seen many of these countries facing recessions, falling incomes, budgetary deficits, and even social unrest.”
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The IEA lists nine countries in all—Iraq, Kuwait, Nigeria, Oman, Qatar, Russia, Saudi Arabia, the United Arab Emirates, and Venezuela—where fossil production accounts for more than 40% of exports and government revenue. It identifies another four—Canada, Norway, the United Kingdom, and the U.S.—as “other economies” where petroleum plays an outsized role. And it presents three future scenarios, at least one of which is unrealistic in anything approaching a post-carbon future, that will all require significant change in the way the petro-states conduct themselves.
“How these producers respond to a changing policy and market environment is crucial not only for their own future prospects, but also for global energy markets, energy security, and the achievement of global sustainable development goals,” the report states.
The first of the IEA’s three oil price and climate policy scenarios is relatively favourable to the fossil economy—and fails to meet even the inadequate targets in the Paris Agreement. “Here, despite rapid renewables growth, global hydrocarbon demand and prices rise, particularly as U.S. oil production plateaus in the mid-2020s,” Carbon Brief states. “Producer economies see far higher revenues from oil and gas than in the other two scenarios.”
But even then, “the arguments for reform remain strong due to market volatility risk, long-term policy uncertainty, and the need to create jobs for large numbers of young people in countries such as Iraq, Nigeria, and Saudi Arabia.”
The reforms the IEA has in mind, already contemplated by some of the petro-states highlighted in the study, would “reduce dependence on volatile oil and gas revenue”, incorporate low-carbon technologies in national diversification strategies, and shift the structure of often-pervasive fossil fuel subsidies, Carbon Brief notes.
In the second scenario, oil prices remain stuck around US$60 to $70 per barrel, and fossil-producing countries lose a cumulative $7 trillion through 2040 compared to the higher projection. “Without far-reaching reforms, this would translate into large current account deficits, downward pressure on currencies, and lower government spending,” the IEA concludes. “In the Middle East, the downside economic risk equates to a $1,500 drop in average annual disposable income per person.”
The third projection, dubbed the Sustainable Development scenario, aligns with the United Nations Sustainable Development Goals and the “well below 2.0°C” target in the Paris Agreement. “In this scenario, there is an inescapable imperative to prepare for a world in which hydrocarbons are no longer the main source of revenue,” the IEA states, even if “there may be alternative ways to monetize hydrocarbon resources that do not contribute to global emissions.”
Those options, in the IEA’s view, could include carbon capture, utilization and storage and greater reliance on hydrogen as a fuel.
The report also points to the depth of fossil fuel subsidies in producer economies, with Venezuela, Iran, Kuwait, and Saudi Arabia reporting the highest subsidy rates. “Some producer economies have already taken steps to introduce reforms to fossil fuel subsidies,” Carbon Brief notes, “particularly in light of the fall in oil price from 2014. Iran, for example, has more than doubled the price of regular gasoline since 2010, with plans to invest the extra money in job creation.”