Climate action is poised to punch a $9 trillion hole in petrostates’ budgets

An llegal oil refinery is seen in Nigeria’s Ogoniland in 2011
An llegal oil refinery is seen in Nigeria’s Ogoniland in 2011
Image: Reuters/Akintunde Akinleye
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The “resource curse” was coined in 1993 to describe a phenomenon British economist Richard Auty observed around the world: Countries richly endowed in natural resources often descended into grinding poverty.

Oil is a primary culprit. With few exceptions, economies sitting above rich reservoirs of fossil fuels develop anemic economies beset by corruption. Of 23 countries earning at least 60% of their export revenue from oil and gas—including Angola, Venezuela, and wealthy Middle Eastern countries like Saudi Arabia—only one is a democracy, Larry Diamond, a Stanford University political science researcher, writes in his book The Spirit of Democracy.

Now even that source of wealth is in jeopardy. A recent study by the Carbon Tracker Initiative, a nonprofit energy and financial think tank, found the 40 countries most reliant on fossil fuel income could see oil revenues fall by an average of 46%—a total of $9 trillion—over the next 20 years due to international initiatives to meet the Paris Agreement’s emission targets. Most of that pain will be borne by 19 countries home to 400 million people, about half of them in Nigeria and Angola.

But there’s plenty of budget pain to go around. Small nations such as South Sudan and Bahrain derive more than 70% of their revenue from petroleum and face comparable future shortfalls, while huge players that include Saudia Arabia (69% of government revenue from oil and gas), Russia (23%), Iraq (89%), and Mexico (18%) are also vulnerable.

Image for article titled Climate action is poised to punch a $9 trillion hole in petrostates’ budgets
Image: Carbon Tracker

To come up with its estimates, Carbon Tracker modeled a sustainable development scenario defined by the International Energy Agency that is likely to keep warming within 1.65°C and oil prices around $40 a barrel. That’s not far off analyst predictions that suggest oil will peak in 2028 (slightly before pre-pandemic estimates) at around 102 million barrels, before falling another 50% by 2050, according to Rystad Energy.

But climate action may stall, and a business-as-usual scenario would look markedly different. Groups such as OPEC and others predict oil prices could level off at an average of $60 per barrel without policy interventions, allowing production to rise through 2040. That’s likely to lead to catastrophic warming far above the 1.5°C target in the Paris Agreement.

How to avoid the resource curse

Carbon Tracker argues countries can get ahead of the game with an “orderly wind down,” using oil and gas revenue to build up an economic sector free from fossil fuels. Saudi Arabia, the world’s largest oil exporter, is already doing so by investing its enormous oil wealth in tourism, industry, and startups (the country still needs an oil price of about $78 per barrel to cover its budget expenditures, although that number has been steadily declining in recent years).

“Many of the countries are trying to do something to reduce their reliance, but actually doing it is very difficult, particularly for countries that have lower resources to begin with,” wrote Andrew Grant, head of Carbon Tracker’s climate, energy and industry research, by email. “If they leave it until oil demand is already heading steadily down, then it will be much too late and they will have much less room to maneuver.”

Countries that succeed in weaning themselves off fossil fuels will mirror a strategy being executed by Norway, which escaped the resource curse after building up its own sovereign wealth fund. Although established with modest expectations in 1990, Norway’s Government Petroleum Fund now stands as the world’s largest, with more than $1 trillion in assets (a more than 3,000-fold increase over 25 years).

“The return on the investments in global financial markets has been so high,” said fund chief executive Yngve Slyngstad in 2019, “that it can be compared to having discovered oil again.”