The one-two punch of the global coronavirus pandemic and the collapse of oil prices is hollowing out the budgets of oil-producing countries, raising fears of instability in certain corners of the globe.
Many oil-producing countries are no strangers to war, corruption and economic challenges. But a global recession coinciding with an agonizingly oversupplied oil market magnifies the danger.
In a spectacularly ill-timed move, Saudi Arabia and Russia initiated a price war at the start of once-in-a-century pandemic. The oil market could take years to recover, and will likely never be the same.
The largest oil producers – the U.S., Russia and Saudi Arabia – have “greater headroom to ride out the current storm,” Verisk Maplecroft said last month. But the “second tier of major oil producers face a much bigger set of challenges.” The firm singled out Ecuador, Angola, Venezuela and Iraq as particularly at risk.
Ecuador presents a worrying case. Ravaged by the coronavirus, Ecuador’s first priority is to try to get a handle on the public health crisis. But the dollarized economy is also facing calamity from falling oil production, low oil prices, and a political and economic crisis that predates the pandemic. Ecuador’s President Lenin Moreno “faces a likely sovereign debt crisis that could see his term end ahead of schedule,” Verisk Maplecroft warned.
The Iraqi economy is at the “brink of catastrophe.”
Some other names are familiar to economic and security challenges. The Iraqi economy is at the “brink of catastrophe,” as the Washington Post put it earlier this month. For the first time in decades, Iran requested financial assistance from the International Monetary Fund. Hit hard by COVID-19 and already reeling from draconian U.S. sanctions, the collapse of oil prices has further squeezed the Iranian economy.
The Venezuelan economy could shrink by another 15 percent this year. Having already slogged through an economic, political and security crisis for the last half-decade or so, the steep drop in oil prices and the spread of the coronavirus compounds the problems in the South American country. President Nicholas Maduro has defied expectations and withstood an onslaught from the U.S. government seeking regime change – and even squashed a bizarre coup attempt recently – so it’s not clear that another crisis will lead to his demise. But the misery continues.
In April, the IMF said that real GDP in oil-producing countries in the Middle East and North Africa would plunge by 4.2 percent in 2020. Because of the array of security and social obligations, oil-producing countries have high fiscal breakeven prices. For Algeria, Bahrain, Iran and Oman, that breakeven price exceeds $80 per barrel, according to the IMF. Saudi Arabia’s breakeven threshold is only slightly lower.
Richer oil producers are not immune. The Gulf States – Saudi Arabia, the UAE, Kuwait, Oman, Qatar and Bahrain – have fixed or managed exchange rates to the U.S. dollar. Wide budget deficits from low oil prices require burning through foreign exchange in order to maintain the currency pegs. In March, for instance, Saudi Arabia’s cash reserves declined by a record $24 billion, dipping to $479 billion. Having previously earned fawning headlines for his “visionary” economic plans, Crown Prince Mohammed bin Salman is now presiding over a campaign of austerity.
For some weaker oil producing countries, a currency depreciation might be inescapable. In fact, Nigeria recently did just that. The unofficial exchange rate is detaching from the official one, suggesting that another depreciation could be in the offing.
“When there’s no more vessels to load the crude, then the entire world collapses.”
Unrest, hunger, uncertainty
Although the fallout is impossible to predict, the risk of unrest is rising. “When there’s no more vessels to load the crude, then the entire world collapses,” Kola Karim, chairman of Shoreline, Nigeria’s third-largest oil producer, told the Wall Street Journal in April. “You will have serious, serious security implications. Unrest.”
The World Food Programme (WFP) said in April that global hunger could reach “biblical proportions” because of the coronavirus pandemic. “The truth is we do not have time on our side,” David Beasley, the head of the WFP, told the UN Security Council in April.
Global remittances are also falling sharply as richer economies fall into deep recession. Around 1 billion migrants send remittances back to their families, a vital economic lifeline for the world’s poor. The value of remittances is set to decline by $142 billion this year, according to the World Bank, the largest decline on record, dating back to 1980.
Looking out further, the path to decarbonization means oil demand destruction over the long run. For countries that source 80 or 90 percent of their revenues from oil exports, the shift to clean energy presents an existential risk. The current pandemic is a crash course on what peak oil demand may look like for economically weak oil-producing countries.
Diversification and transition are needed. “It would be a failure of vision to separate the current crisis from the one on the horizon. A series of makeshift interventions may assist vulnerable oil-producing countries in rapid recovery, but what they need is a concerted strategy to wean themselves off their dependence on fossil fuel exports,” Nicholas Mulder and Adam Tooze wrote in Foreign Policy in April. “Otherwise, the oil counter-shock of 2020 will be no more than the first step on a path toward terminal crisis.”