The World Isn’t Ready for Peak Oil

Amos Hochstein

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Two months ago, the world experienced a historic collapse in oil prices, as coronavirus-related shutdowns cratered global demand, briefly turning prices for May delivery negative. Prices have since rebounded modestly, but they remain unsustainably low for countries that depend on oil exports to generate government revenue.

The resulting instability, from the Middle East to Africa to the Americas, raises a flurry of immediate national-security concerns. But the current crisis also offers a stark preview of the challenges the world will face if it negotiates a climate accord without also moving to stabilize the more than a dozen countries that depend on oil exports as their primary source for generating government revenue.

In Iraq, for example, oil revenues account for 90 percent of the government’s budgetary income and two-thirds of its economy. This year’s falling oil prices have already reduced the country’s revenues by half.

Before the outbreak, Iraq’s unemployment rate hovered around 50 percent, and Baghdad faced a wave of youth-led protests that ultimately led to the ouster of Prime Minister Adel Abdul Mahdi. But with dwindling revenues, the new government will be hamstrung in its efforts to improve economic conditions. To make matters worse, among Iraqis who are employed, 30 percent work in some capacity for the government. The World Bank estimates that Iraq will need oil prices to return to $58 a barrel just to meet its wage and pension obligations.

This is why the Obama administration, in which I served as the special envoy and coordinator for international energy affairs, pursued climate goals in Paris at the same time that it was investing in Iraq’s oil and gas infrastructure. We understood that a transition to a green economy couldn’t happen at the flip of a switch, especially in countries so economically dependent on fossil fuels.

Nigeria, Africa’s largest economy, also finds itself in a precarious situation. Oil exports account for more than half of its government revenue and 90 percent of its foreign-exchange earnings. Yet the price decline means that Nigerian oil is currently being traded at prices lower than it can be produced. If Nigeria is priced out of global oil markets, the result could be catastrophic. What happens when half of the budget disappears in a country where more than 80 million people already live on less than $1 a day?

Some version of this story is playing out across multiple continents. According to the International Monetary Fund, Algeria, which depends on oil revenue for about 40 percent of its budget, will need oil prices to reach $109 a barrel in order to break even. In Libya, where the petroleum sector accounts for 60 percent of GDP, the break-even price is $100. Meanwhile, in our own neighborhood, oil accounts for a third of Mexico’s tax revenue and a quarter of Ecuador’s. If prices settle in the $30 to $40 range, the consequences could easily cascade, creating new regional instability in many parts of the world.

A spiraling collapse in government funding is likely to exacerbate existing tensions within the affected countries. Indeed, it already is. In Iraq, for example, ISIS has increased attacks in the northern city of Kirkuk by 200 percent this year, according to the Middle East Institute. In Nigeria, fears abound that another violent insurgency may take root in the Niger Delta, where a fragile peace is held together by monthly stipends the government may no longer be able to afford. Boko Haram, too, may find a new opportunity to gain a foothold, especially if the Nigerian government is unable to pay its already underfunded military.

Perhaps most disconcerting is the likelihood of a new international migration crisis. The combination of weakened governments, broad economic calamity, and surging violence is a recipe for severe dislocation, which could create spillover effects across borders. The most recent major migration crisis, which began with the Syrian civil war in 2011, helped give rise to ISIS while at the same time igniting a wave of ethno-nationalism in the West that threatens global institutions and alliances today.

We may avoid a repeat of such events for now. As countries begin to reopen their economies, global demand for oil may receive a sufficient boost to stave off the worst-case scenarios. But assuming that any such reprieve would be lasting would be a mistake. The coronavirus oil shock is not a one-off crisis; it is a dress rehearsal for a future fast unfolding.

The world is, after all, in the midst of an inevitable transition away from fossil fuels, and there can be little doubt that an effective climate-change strategy will reduce substantially the demand for oil. The details of the efforts to combat climate-change will determine how—and how soon—the world reaches peak oil. But reach it, it will, or perhaps it already has. And as it does, the international community must be prepared to manage the fallout in countries that depend on oil for their revenue.

That work should begin with a rejection of the siloed approach we take to our global policy, in which climate negotiators, national-security experts, and business leaders are rarely in the same room, across the same table from one another. At the next climate summit, we should make room for more seats, so that the accord includes an international coalition of governments and global institutions working to secure capital for a developing world that is currently hemorrhaging cash. We will need to invest in these nations, and help their economies and governments transition away from their dependence on petroleum. And, ultimately, the United States will need to reclaim its place on the global stage—as the leader of that coalition, rather than its leading antagonist.