Global oil demand may peak in the next 10 years, but some oil-producing countries highly dependent on oil revenues are not prepared for this potential shift. A recent report from the UK climate and energy policy think tank E3G warns that a decline in oil revenue could lead to financial crises, increasing risks of social unrest, conflicts, and population outflows.
E3G released the report “The Endgame of Oil: Oil-producing Countries and Geopolitics of Declining Demand” on Tuesday, September 8th. The report suggests that with the advancement of renewable energy, many countries are already experiencing a decrease in oil consumption, with the impact of the Iran war further accelerating this trend. It predicts that global oil demand may peak between 2030 and 2035.
Currently, there are 17 oil-producing countries where over 40% of government revenue comes from oil and natural gas. These revenues support government spending, public services, and debt repayment. If these revenues significantly decrease, financial issues could escalate into political and security risks.
E3G highlights that countries highly reliant on oil income, lacking fiscal buffers and economic diversification capabilities, such as Nigeria, Angola, and Algeria, are at a higher risk. Should oil revenue drastically reduce, governments might be forced to cut public spending and subsidies, leading to increased debt pressure. Once the ability to provide public services and maintain social stability is affected, financial crises could further result in social unrest and conflicts.
The report also notes that a reduction in oil demand does not necessarily prompt oil-producing countries to immediately reduce production. Some countries, concerned about the future challenges in selling oil, may instead increase output while there is still a market to quickly turn underground oil into revenue.
Population outflow poses another potential risk as warned by E3G. Some oil-producing countries rely on oil revenue to sustain public spending, subsidies, and basic services, while the oil industry supports a significant number of related jobs. If income declines, and other industries cannot promptly offer new economic sources, social and economic pressures could intensify population outflows.
Algeria is particularly under scrutiny. This North African country heavily depends on oil and gas revenue, situated across the Mediterranean from Europe, with energy exports closely linked to European markets. If severe financial difficulties and social instability arise due to declining oil revenue locally, it could increase the migration and security pressures faced by Europe.
E3G emphasizes that these risks do not imply countries should slow down the pace of reducing oil consumption. The issue lies in the lack of preparedness for the transition, where countries highly reliant on oil income could suddenly lose a crucial fiscal support.
The report suggests that oil-producing countries, major oil-consuming countries, and international financial institutions should prepare in advance. This includes promoting economic diversification, providing transition financing to mitigate the fiscal and social impacts of declining oil revenue.