“The imbalances in the energy sector show that the global economy has run out of steam”

Olivier Rech, Director of Energy-Climate Research at Beyond Ratings, is interviewed in ideas4development.org

The fall in the price of oil affects all countries which export and import this energy source. An analysis of these impacts with Olivier Rech, Head of Energy-Climate Research at Beyond Ratings, formerly an economist at the French Petroleum Institute (IFP), at the Office of the Chief Economist of IEA, and a consultant at Carbone4. He was a speaker at the meeting on “Oil at less than USD 30 a barrel: What consequences for development?”, which was held at AFD.
What impact will the current fall in prices have on oil-producing developing countries?

The fall in the price of oil since late 2014 firstly leads to immediate effects on international trade balances. Net exporting countries of hydrocarbons and energy in the broad sense are seeing their energy trade surplus fall by some 60%, which in some cases runs the risk of turning their entire foreign trade into a deficit. This order of magnitude is as expected, following the fall in international oil prices of some 60%, but the purely accounting consequences, particularly at high frequency, are only the most visible part of the ramifications which have been profoundly affecting all stakeholders for several months.

In recent months, several countries which produce and export fossil fuel resources have faced a loss of interest by international investors for the investment opportunities proposed in their mining sectors. Auctioning and allocation procedures for exploration rights have consequently resulted in failure, like in Brazil, Mexico and Algeria. These negative results, in some cases dramatic, are indeed in line with the cyclical nature which is inherent to these industries and are no real surprise, but the economic climate alone cannot account for the announcement of major reforms marked with a certain degree of urgency.

The destabilization of public finances and the decrease in foreign exchange reserves triggered by the sudden drop in export revenues propel the disappearance of subsidy systems for domestic energy prices.

What is even more striking is the reorganizations of several major national energy groups, or the change in the organic link between the State and national companies, with the most marked examples being the announcement of the privatization, admittedly very partial, of Saudi Arabia’s national oil company and, to a lesser extent, the major reorganization of Nigeria’s national company. These reforms, by calling into question the historical principles of the ownership and exploitation methods of natural resources, bring about largely underestimated breaks and risks without, furthermore, any guarantees over what they will allow the countries concerned to avoid, from a macroeconomic perspective, in terms of the adverse phases of the next cycles and other economic fluctuations.

Do importing countries really benefit from this fall in prices?

In a symmetrical manner, net importing countries see a marked improvement in their energy trade balance, close to 50%, which is, however, not sufficient as such to remove the structural component of the deficit.

In line with this observation, converging signs prove that several importing countries seize the fall in international prices as an opportunity to reform, or even to eliminate, subsidy systems for domestic energy prices, first and foremost for fuels and combustibles. In the long term, this transition guarantees that public finances are less directly exposed to fluctuations in international prices. But this rationalization requires a level of exposure to the price signal that is unknown by the populations concerned. The social acceptability of these reforms will only really be tested at the next, but inevitable, turnaround in the international price cycle.

What solutions can be considered to offset the structural imbalances related to energy trade?

The last four decades have been marked by energy importing countries being suffocated by the deterioration of both private and public debt, the development of the shale industry thanks to inflated capital flows, which now have a high risk, then by the destabilization of exporting countries struck by the fall in oil prices since 2014. This trend confirms the diagnostic of a global economy that has run out of steam. Without being the only cause, fossil fuel trade is the main contributor to the accumulation of structural imbalances.

Reducing dependence on both the exploitation and consumption of fossil fuels is a prerequisite in order to break the inevitability of sterile and inevitably destructive debt cycles which alternately affect exporting and importing countries. The reforms carried out in energy importing and exporting countries partly converge through their content, particularly in terms of energy taxation. But they will only produce significant and sustainable impacts in the context of a transition policy combining the three components of energy efficiency, electrification and support for low-carbon energy sources, which are more resistant to economic cycles and shocks in oil prices.

In this respect, the phenomenon common to non-OECD countries, both exporters and importers of fossil fuels, of continued growth in investments in all these sectors, first and foremost for renewable energies in recent years and up until 2015, is a very positive signal. It shows that emerging countries are firmly committed to this change.