Only Security Can Buy Time for Oil-Exporters to Evolve

Iraq, Libya and Nigeria face long-running conflicts

Only Security Can Buy Time for Oil-Exporters to Evolve Only Security Can Buy Time for Oil-Exporters to Evolve
As energy ministers and corporate executives emerge from CeraWeek in Houston in early March 2018, it is increasingly clear that the future of OPEC... Only Security Can Buy Time for Oil-Exporters to Evolve

As energy ministers and corporate executives emerge from CeraWeek in Houston in early March 2018, it is increasingly clear that the future of OPEC is shrouded in a dark, murky liquid. The cartel’s 14 member states, including Saudi Arabia, United Arab Emirates and Iran in the Middle East, African oil producers from Algeria to Angola and South American exporters Ecuador and Venezuela, share a wide geographical spread that mirrors their varying degrees of reliance on oil’s net contributions to OPEC member GDPs over time, as seen in this World Bank data:

Even more telling is oil’s share of overall merchandise exports in most of the OPEC countries. In 2015, oil made up almost 100 percent of Iraqi merchandise exports and 95 percent of Angolan ones. Saudi Arabia, one of OPEC’s more diversified economies, still saw oil make up 78.5 percent of its exports.

With many OPEC countries’ export economies singularly dependent on oil, the huge hit oil prices have taken in recent years produced a deceptive spike in how much service-oriented sectors contribute to their GDPs. The dramatic declines in OPEC member GDP numbers quantify the price they have had to pay for remaining far too reliant on energy exports and not using years of oil-induced prosperity to diversify economies and develop more skilled workforces.

OPEC nations are belatedly realizing the precariousness of their situation and finally contemplating significant reforms, even as rebounding oil prices are helping some OPEC nations such as Nigeria begin to recover from GDP drops.

As is often the case within OPEC, the most ambitious example of reform has taken shape in Saudi Arabia. Saudi heir-apparent Mohammed bin Salman has a “Vision 2030” plan which includes the sale of a stake of up to five percent of national “crown jewel” Saudi Aramco, potentially the largest IPO in history, though even this plan is unclear to investors.

Vision 2030 aims to use those IPO proceeds to create the largest sovereign wealth fund in the world, while installing of 9.5 gigawatts of renewable energy and constructing futuristic mega-cities in the desert. Saudi Aramco CEO Amin Nasser used his appearance at CeraWeek to insist the oil industry has a strong future, but his government is clearly hedging its bets.

If the Saudi program makes good on its ambitions, it could be a model for other OPEC nations. But whether it is successful depends on whether proponents of economic reform can overcome deeply entrenched interests. Saudi Arabia’s moves to allow women to drive and open businesses without permission are welcome, if long overdue, developments, and some Saudi women are hopeful these changes are harbingers of possible social and legal equality.

That said, Saudi authorities have a lot of ground to cover between the current status quo and robust female participation in the economy.

The key to ending Saudi Arabia’s overdependence on oil lies in diversification, and especially in courting foreign investment. The latter objective currently has MBS visiting Britain and the United States. But those investors whose support MBS seeks are increasingly rattled by both the use of coercion and a lack of promised transparency in the reform process, tying into a broader regional concern over lackluster governance that is prominent among potential foreign investors.

Above and at top — oil wells burn near Qayyarah, Iraq in 2016. Matt Cetti-Roberts photos

Over the longer term, investors want to see major reforms in this area, with the Middle East’s other oil-reliant economies sharing similar problems according to a 2016 data-heavy study from the University of Tlemcen in Algeria.

That study’s authors argue the best way out of the oil price trap is through robust, long-term reform to ensure good governance and economic diversification. Good governance, however, requires stability. Many OPEC countries have been unstable for some time.

Iraq, Libya and Nigeria face long-running conflicts against Islamist militants and other insurgents, while Iran and Venezuela have been plagued with eruptions of political unrest. Finally, there are serious intra-OPEC tensions between de facto leader Saudi Arabia and its OPEC allies on one side and nearby Iran and Qatar on the other.

These tensions are arguably fueling the recovery in oil prices just as much as agreements between OPEC and key non-OPEC producers like Russia to limit output. But the aforementioned problems, however, mean many OPEC countries are far less able to shape their post-oil futures compared with Saudi Arabia.

The Venezuelan economy, for one, has shrunk in half since 2013. The beleaguered nation may now be the least stable country in the Western Hemisphere. The country’s desperate need to raise cash has resulted in a risky gamble with a cryptocurrency, the “petro,” backed by barrels of crude oil. The petro’s creation is a bold move, but has already been declared illegal by the opposition-led parliament and is extremely unlikely to address any of the core problems devouring what is left of Venezuela’s stability.

Angola’s new leader, João Lourenço, is surprising many by actually moving forward on major reform after the country’s decades of misrule. He has devalued his country’s currency twice so far in 2018, though observers estimate Angola will require further reform. That proposition doesn’t come risk-free: the value of Angola’s significant debt burden will skyrocket as its currency falls.

The new president’s momentum is also threatened by a major corruption scandal involving Isabel dos Santos, Africa’s richest woman, whom Lourenço removed as head of Angola’s national oil company. A new audit has uncovered a dubious $38 million transaction from her tenure. As her father, former president José Eduardo dos Santos, remains the head of the ruling party of which Lourenço is a member, the prospect of ugly political infighting could seriously hamper Angola’s reorganization.

Despite the optimistic tone struck at CeraWeek, the prognosis for OPEC’s future is a mixed one. Investors are still watching and waiting for OPEC member states to prove themselves serious about reform over the long haul. At this point, a solid and consistent commitment to reform is even more valuable a commodity than oil.

Brian E. Frydenborg is a freelance journalist and consultant based in Amman, Jordan. You can follow him on Twitter at @bfry1981.

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