Petrostates need to bridge $9 trillion income gap in energy transition
Nations must act now to diversify economies and support livelihoods
LONDON/NEW YORK, February 11 – Oil and gas producing countries face a multi-trillion dollar hole in government revenues over the next 20 years as the world decarbonises, with some needing strong international support to diversify their economies and avoid social and political instability, finds a report from Carbon Tracker released today.
For the first time it calculates that 40 petrostates could face an average 46% drop in expected revenues from oil and gas if demand falls in line with tightening global climate policy and technological advances – a shortfall of $9 trillion.
Over 400 million people live in the 19 worst affected countries where declining fossil fuel revenues could see total government income fall by at least 20%, leading to cuts in public services and job losses. Half live in Nigeria, where a 70% drop in oil revenues would cut total government income by a third. Angola, home to 33 million, could lose over 40% of government income.
Many of the world’s biggest oil and gas producers including the US, UK, Netherlands, China, India and Brazil also face major falls in revenues but they are not a focus of the analysis because their economies are less dependent on oil and gas. Worldwide, all oil producing countries risk collectively losing $13 trillion by 2040 compared with industry expectations, a 51% drop.
Report author Mike Coffin, senior analyst oil, gas & mining said: “It’s in the interests of all nations to minimise global temperature rise and this means rapidly reducing our use of fossil fuels. But many countries are heavily reliant on oil revenues – the time to act on rebalancing their economies is now. Waiting for demand to fall will be leaving it far too late.”
Andrew Grant, head of climate, energy & industry and co-author said: “Government oil revenues will shift dramatically as the market shakes out during the energy transition. Understanding the scale of the challenge and which nations are most vulnerable will help policymakers focus their efforts. Cushioning the landing for hundreds of millions will deliver better outcomes for both climate and human development.”
Beyond Petrostates: The burning need to cut oil dependence in the energy transition calls on petrostates to act now to reduce their dependence on oil and gas revenues, by cutting public spending, raising new taxes, and restructuring their economies. It warns that continuing to invest in new oil and gas projects risks creating stranded assets and wasting capital that would be better spent on developing sustainable new industries.
Petrostates will minimise losses if there is an orderly wind down of production, with global supply falling in line with decreasing demand and falling oil prices. If they go it alone and seek to monetise their existing reserves while they can, oversupply is likely to destroy value for all, with falling prices quickly outweighing the benefit of increased production.
Many petrostates are already adopting measures to try to bridge the expected hole in their finances. Several Middle Eastern countries have introduced value-added taxes and, with countries like Nigeria, Angola and Iran, taken steps to reduce subsidies. Wealthy gulf states are investing in industries like renewable energy and tourism. However, the scale of the challenge is huge, and the pace of transition accelerating.
Many countries facing the biggest shortfalls are also among the poorest, have young and rapidly growing populations with least capacity to adapt their economies.
The international community can help the most vulnerable countries, for example by supporting the development of new technologies, offering technical assistance for regulatory and tax reform, and providing capital.
The report notes that it is in the international community’s interest to help petrostates successfully navigate the energy transition. Reducing their dependence on fossil fuel production will make it easier for the world to meet global climate targets, and also help these countries avoid instability and social unrest as the global economy is decarbonised.
Financial support to help developing countries reduce emissions and adapt to climate change is already a hot topic in the run-up to the COP 26 climate summit. In 2009, rich countries pledged to provide $100 billion of climate finance a year from 2020, but they have yet to meet this target. Beyond Petrostates focuses attention on the wider issue of supporting governments to wean their finances off fossil fuel revenues.
The report is a wake-up call to petrostates and international policymakers that have based their planning on industry and OPEC forecasts that demand for oil will increase through to 2040, and a long-term price of $60 a barrel or higher. Carbon Tracker warns that demand will have to fall to meet climate targets, and explores changes to government revenues if global temperature rise is limited to 1.65°C and oil prices average $40 a barrel.
Governments in oil and gas producing countries make money from oil in two ways: revenues from state-owned National Oil Companies, which produce 55% of the world’s oil; and taxes and fees from private sector fossil fuel companies. The report identifies the 40 countries with the greatest fiscal dependence on these revenues, analyses the proportion of current revenues at risk, and identifies which are most vulnerable.
It reveals that many countries would see a drastic fall in total government income compared with the average over the last five years (2015-2019):
- Angola and Azerbaijan are among seven countries that could lose at least 40% of total government revenues.
- Nigeria, Algeria, Saudi Arabia, Kuwait and Iraq are among 12 that could lose 20%-40% of revenues.
- Mexico, Russia and Iran are among ten countries could lose 10%-20% of revenues.
- Norway and Malaysia are less vulnerable among the petrostates because of their diversified economies, but still stand to lose 5%-10% of government revenues.