The Desperate Plight of Petrostates1 2 3
Pity the poor petro-states. Once so wealthy from oil sales that they could finance wars, mega-projects, and domestic social peace simultaneously, some of them are now beset by internal strife or are on the brink of collapse as oil prices remain at ruinously low levels. Unlike other countries, which largely finance their governments through taxation, petro-states rely on their oil and natural gas revenues. Russia, for example, obtains about 50% of government income that way; Nigeria, 60%; and Saudi Arabia, a whopping 90%. When oil was selling at $100 per barrel or above, as was the case until 2014, these countries could finance lavish government projects and social welfare operations, ensuring widespread popular support. Now, with oil below $50 and likely to persist at that level, they find themselves curbing public spending and fending off rising domestic discontent or even incipient revolt.
At the peak of their glory, the petro-states played an outsized role in world affairs. The members of OPEC, the Organization of the Petroleum Exporting Countries, earned an estimated $821 billion from oil exports in 2013 alone. Flush with cash, they were able to exert influence over other countries through a wide variety of aid and patronage operations. Venezuela, for example, sought to counter U.S. influence in Latin America via its Bolivarian Alliance for the Peoples of Our America (ALBA), a cooperative network of mostly leftist governments. Saudi Arabia spread its influence throughout the Islamic world in part by financing the efforts of its ultra-conservative Wahhabi clergy to establish madrassas (religious academies) throughout the Islamic world. Russia, under Vladimir Putin, used its prodigious oil wealth to rebuild and refurbish its military, which had largely disintegrated following the collapse of the Soviet Union. Lesser members of the petro-state club like Angola, Azerbaijan, and Kazakhstan became accustomed to regular fawning visits from the presidents and prime ministers of major oil-importing countries.
That, of course, was then, and this is now. While these countries still matter, what worries these presidents and prime ministers now is the growing likelihood of civil violence or even state collapse. Take, for example, Venezuela, long an ardent foe of U.S. policy in Latin America, but today the potential site of a future bloody civil war between supporters and opponents of the current government. Similar kinds of internal strife and civil disorder are likely in oil-producing states like Algeria and Nigeria, where the potential for the further growth of terrorist violence amid chaos is always high.
Some petro-states like Venezuela and Iraq already appear to be edging up to the brink of collapse. Others like Russia and Saudi Arabia will be forced to reorient their economies if they hope to avoid such future outcomes. Whatever their degree of risk, all of them are already experiencing economic hardship, leaving their leaders under growing pressure to somehow alter course in the bleakest of circumstances — or face the consequences.
A Busted Business Model
Petro-states are different from other countries because the fates of their governing institutions are so deeply woven into the boom-and-bust cycles of the international petroleum economy. The challenges they face are only compounded by the unnaturally close ties between their political leaderships and senior officials of their state-owned or state-controlled oil and natural gas industries. Historically, their rulers have placed close allies or even family members in key industry positions, ensuring continuing government control and in many cases personal enrichment as well. In Russia, for example, the management of Gazprom, the state-controlled natural gas company, and Rosneft, the state-owned oil company, is almost indistinguishable from the senior leadership in the Kremlin, with both groups answering to President Putin. A similar pattern holds for Venezuela, where the government keeps the state-owned company, Petróleos de Venezuela, S.A. (PdVSA), on a tight leash, and in Saudi Arabia, where the royal family oversees the operations of the state-owned Saudi Aramco.
In 2016, one thing is finally clear, however: the business model for these corporatized states is busted. The most basic assumption behind their operation — that global oil demand will continue to outpace world petroleum supplies and ensure high prices into the foreseeable future — no longer holds. Instead, in what for any petro-state is a nightmarish, upside-down version of that model, supply, not demand, is forging ahead, leaving the market flooded with fossil fuels.
Most analysts, including those at the International Monetary Fund (IMF), now believe that increases in energy efficiency, the spread of affordable alternative energy sources (especially wind and solar), slowing worldwide economic growth, and concern over climate change will continue to put a damper on fossil fuel demand in the years ahead. Meanwhile, the oil industry — now equipped with fracking technology and other advanced extractive techniques — will continue to boost supplies. It’s a formula for keeping prices low. In fact, a growing number of analysts are convinced that world oil demand will in the not-so-distant future reach a peak and begin a long-term decline, ensuring that large reserves of petroleum will be left in the ground. For the petro-states, all of this means persistent pain unless they can find a new business model that is somehow predicated on a permanent low-oil-price environment.
These states vary in both their willingness and ability to respond to this new reality effectively. Some are too deeply committed to their existing business model (and its associated leadership system) to consider significant changes; others, increasingly aware of the need to do something, find almost insuperable structural roadblocks in the way; and a third group, recognizing the desperate need for change, is attempting a total economic overhaul of its oil economies. In recent weeks, examples of all three types – Venezuela for the first, Nigeria the second, and Saudi Arabia the third — have surfaced in the news.Wait, before you go…
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