Business

Why Petrostates must diversify to cope with fluctuating oil prices

Saudi Arabia, a giant petrostate, has a well-known plan to become something more, known as “Vision 2030”. This week the kingdom held an investment conference in Riyadh to discuss its drive to modernise its economy, although it was overshadowed by the murder of Jamal Khashoggi, a journalist. Saudi Arabia’s urge to diversify away from energy is shared by many other countries. Bahrain, Qatar and the United Arab Emirates each have “vision 2030” plans that include reducing their dependence on oil and gas. Iran, Kuwait, Nigeria and Oman have their own strategies for diversification. The idea is not new—these countries have sought to restructure their economies since the 1970s. But the task has become more urgent.

Revenues from oil and natural gas have plunged in recent years, as prices have fallen. A new report from the International Energy Agency (IEA) puts the challenge in stark relief. In six large petrostates the IEA examined—Iraq, Nigeria, Russia, Saudi Arabia, the United Arab Emirates and Venezuela—net income from oil and natural gas in 2016 was less than one-third of its level in 2012. Such a huge drop-off is painful. In Russia, oil and gas receipts account for about 40% of the government’s revenue. In Iraq they account for 90%.

The response to sinking prices has varied. Many countries ran deficits rather than slash their generous domestic spending programmes. Bahrain requires a crude price of $113 a barrel to support its budget, according to MUFG, a bank. But most countries have started talking more earnestly about diversification. Fatih Birol, director of the IEA, predicts that countries’ efforts will gain more urgency for two reasons.

The first is a change in global oil supply. Thanks to shale, America has become the world’s biggest crude oil producer, reducing the power of the Organisation of Petroleum Exporting Countries to control the market. The second is a change in demand. Concerns about climate change make demand much harder to predict, as energy efficiency increases and electric cars become more popular. Oil prices will become more volatile, making it harder for countries to achieve steady economic growth. “Now, more than at any other point in recent history, there is a need to fundamentally change,” argues Dr Birol. Nevertheless, progress may be slow. Plans for reform were hatched when oil prices were low. Now they have ticked up and revenues are rising again. There is a danger that some petrostates rest on their oil riches, as they have many times before. The Economist