A grim warning on impending devastating consequences of over dependence on oil revenue by major global oil producers including Nigeria, has been issued by the International Energy Agency (IEA).
The agency drew attention of the producers that except they consider economic diversification from oil, a major policy trust and gain made over time could be eroded.
The IEA, in a special report which focused on energy producing countries where oil and natural gas make up at least, one third of all exports, and revenues contribute at least one third of total fiscal revenue, warned that inaction or unsuccessful measures to diversify their revenue sources for these major oil producing nations would compound the risks facing both producer economies and global markets.
The agency said it examined Nigeria, Iraq, Russia, Saudi Arabia, the United Arab Emirates and Venezuela, in particular. And urged them to cut their reliance on energy revenue amid advances in fuel efficiencies and that electric vehicles threaten to undercut demand and erode their finances.
The IEA director, Fatih Birol said: “More than at any other point in recent history, I believe there needs to be a fundamental change in the development models of those countries.”
He added that based on an oil price of $80 a barrel, oil and gas revenue for these countries were on average, around $1,800 per capita per year. However, since shale has come into the picture and demand developments such as new technology and efficiencies, that could fall to $1,250 by 2030, a drop of as much as 30 per cent.
“When we look at these countries, on average, they get more than 70 per cent of their government revenue from oil and gas,” he said. “Those are under pressure from prices, they are under pressure from the amount of oil they export and under pressure from population growth. We think it is very different from the past.”
The world’s largest oil exporter, Saudi Arabia, and the world’s largest oil producer, Russia, have long been vulnerable to over reliance on oil and gas export revenue, while Riyadh is still recovering from a near financial collapse due to a plunge in global oil prices from 2015 to 2017.
With oil prices plummeting from over $100 per barrel in mid-2014, to below the $30 price point in January 2016, the kingdom had to enact first time ever, and politically unpopular austerity measures as well as issuing its first international bonds, to help offset budget deficits.
Since then, as oil prices have increased due to the successful Organisation of Oil Exporting Countries (OPEC) strategy of reducing Organisation for Economic Co-operation and Development (OECD), oil inventory levels to five-year averages, reached late last year, Riyadh has managed to offset the drop in revenue.
However, going forward, and since oil markets are cyclical in nature, the kingdom could easily find itself in another financial tail spin if oil prices dip again, amid weakening oil demand and oil market supply overhang.
Russia on its part is also vulnerable from over reliance on oil and gas revenue. While Moscow denies the figure, many claim that the country receives as much has 40 per cent (or even higher) of if its revenue from energy exports, making the country also vulnerable to geopolitical developments, particularly western sanctions, as well as lower oil price moves, a concern echoed by the IEA report.
One way of out for Middle Eastern oil producing countries would be to curtail their domestic oil consumption, Birol added.
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