2020 will go down in history as the year in which the oil market crashed, taking petro-states across the globe with it. Dread of the coronavirus is challenging many countries that depend on oil to fund their national budgets. Lower oil prices mean lower public spending for oil-dependent nations. Less fiscal power for these nations could lead to destabilization, since most already struggle with corrupt governments, weak economies, and demanding young populations.
Even though this crisis has been predicted, the majority of giant global oil producers have been too slow to diversify their economies. Now this popular source of revenue is no longer yielding enough output. If petro-states aim to remain competitive in the energy market, they ought to attract foreign and domestic investment in the emerging green technology market, which could yield sustainable economic benefits for the nations.
In early 2020, global oil demand declined at an alarming rate due to COVID-19 lockdown measures. According to the International Monetary Fund, petroleum spot prices average an estimated $36.20 per barrel in 2020. The IMF expects the price will reach $37.50 per barrel in 2021. Further analysis of the oil market indicates that prices are expected to increase thereafter toward $46 per barrel, still about 25% short of the 2019 average. When oil production is nationalized, this instability causes trouble for governments and institutions.
As COVID-19 restrictions keep crude prices lower for longer, there are profound consequences for the way oil-rich countries are run. Revenue volatility limits a government’s ability to invest and jeopardizes major, multi-year projects such as improvements to healthcare, education, or infrastructure.
Oil revenues make up as much as 90% of the Iraqi government’s budget. The World Bank now suggests that the country’s economy will have its worst performance since the fall of the late President Saddam Hussein in 2003. This could have numerous negative consequences for Iraq, exacerbating its inability to battle domestic terrorism and furthering its vulnerability to foreign intervention.
African nations such as Algeria and Angola are struggling to afford government employees’ paychecks. The Nigerian government struggles to fund the military, which is essential to maintaining its authority against extremist factions.
While oil struggles to hold its market value, the world has already begun shifting to more green technology and renewables. The renewable energy market has also faced a crash, but the overall demand for renewables is expected to increase due to low operating costs. This is a unique opportunity for new competitors to enter the market as producers and innovators. In the near future, these innovations are marketable to other countries. According to IEA, “many producers have world-leading expertise in energy technologies; in addition to their potential in renewables, they are also well-positioned to develop new approaches that reduce or minimize the lifecycle emissions of oil and gas.”
The International Renewable Energy Agency estimates that investment in renewable-energy technologies “could employ more than 40 million people by 2050 and that total energy sector employment can reach 100 million by 2050, up from around 58 million today, should the international community utilize its full renewable energy potential.”
This shift will not only create new and sustainable job opportunities in petro-states currently suffering the consequences of the oil market crash, but it will also put them on a sustainable development track to create new streams of income.
For now, attracting private investment is a big challenge for several petro-states. This is largely due to the states’ own hindrance of privatization efforts, or to hostile foreign relations. As an example, Iran and Venezuela suffer from international sanctions that have weakened their economies to the point of collapse. Also, OPEC members are some of the world’s least open countries to free trade, due to high tariffs imposed by their governments. And since the majority of stakeholders in the oil industry are also public officials, rent-seeking — manipulating public policy to increase profits — is another obstacle.
Petro-states can only recover from the damage COVID-19 has wrought by remaining competitive in the energy sector through the privatization of their energy sectors; the leveraging of domestic and foreign investments; the lowering of tariffs to encourage free trade; and the increase of international technological cooperation via bilateral or multilateral deals. If these nations don’t change something soon, the economic damage they suffer could be worse than the virus itself.