In Venezuela, the country with more oil than any other, shopkeepers now weigh wads of banknotes, rather than count them. This year, inflation is forecast to top 1,600%.
Shortages have lead to protests and violence. The military has expanded its powers to take over, among other things, the food supply in what some observers are calling a “slow motion coup”. A recent Amnesty International mission found the country on the brink of a “catastrophic humanitarian crisis”.
Venezuela’s collapse has caught the eye of security specialists and military personnel from around the world. How has this happened in a state so epically endowed? The answer – an over-reliance on oil coupled with a fragile state – has profound consequences in a world that is seeking to rid itself of fossil fuels.
“You have a rapidly changing economic structure and a world that has had 200 years of an economy purely based on fossil fuels,” Alexander Verbeek, founder of the Planetary Security Initiative told Climate Home. “And then you go and change it. You will get a lot of positive changes. But you have to keep your eyes open if there are risks for instability.”
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According to World Bank data, the global average GDP to come from oil rent is 2.5%. In Venezuela, that fraction is one quarter. In some Gulf states, it approaches 50%. In Russia, oil and gas together make up 25% of GDP.
Oil prices are predicted to revive this year, but security experts have told Climate Home that the past 24 months sounded a warning that must not be ignored.
The world is ever more committed to shaking the carbon monkey from its back. At 2015’s landmark Paris summit, 195 governments effectively agreed to phase out fossil fuels during the second half of the century, unless they come with an emissions abatement technology attached.
While US president-elect Donald Trump may want to reverse the trend, other leaders reaffirmed that commitment last November in Marrakech. As demand for oil and gas is curbed, could other countries follow Venezeula into the abyss?
Students protest in Caracas in 2014 (Photo: Jsnake17/Commons)
“We must be very careful, so that the mistakes of the people at the top do not result in popular uprisings due to suffering of the masses,” says retired major general ANM Muniruzzaman, chairman of the Global Military Advisory Council on Climate Change.
The idea of a carbon bubble has gained traction in recent years as one of the major economic risk factors associated with climate change. If leaders are serious about winding down carbon emissions, reserves from which oil companies derive their value will become worthless. Proponents of this analysis, which include the International Monetary Fund and Bank of England governor Mark Carney, warn that shareholders in oil companies could be holding onto toxic assets.
In the past two years, the oil price crash has exposed a similar weakness across the petroeconomies of the world. The companies with the biggest oil and gas reserves on earth are owned by states, including Saudi Arabia, Russia, Venezuela and Iran. Many of these countries have borrowed heavily against the value of these reserves.
In Venezuela, the oil price drop aggravated a multi-faceted failure of governance, but the value of its single major export halving was a sledgehammer blow.
Since the late 1990s, income from this wealth has been used to secure the popularity of the Hugo Chavez and Nicolas Maduro governments. Venezuelans had grown used to the subsidisation of products; from oil more than 100 times cheaper than water, to rice and toilet paper, and luxury items such as DVD players and cars.
To service these programmes, the government bought in huge debts, underwritten by the seemingly unending value of the country’s huge oil reserves. All this meant that by 2014, the oil price required by Venezuela’s budget to break even was well over US$100 per barrel – one of the highest of all members of the Organization of the Petroleum Exporting Countries (Opec).
Source: Chatham House
“The characteristics of the countries who are fossil fuel suppliers, partly because they are fossil fuel suppliers, means that they have some really deep structural instabilities and the governments were planning on much higher long term oil prices,” says chief executive of the E3G consultancy Nick Mabey.
The subsequent collapse has not been immediately replicated across the oil-producing world because other countries don’t have the in-built decrepitude of the Chavist economic model. But many are vulnerable to a longer term downturn.
For reasons both chicken and egg, many oil-rich states are ruled over by regimes that tend towards authoritarianism. These states lack the buffers against unrest provided by democracy.
“The dynamics are very simple,” says Mabey. When oil prices are high, governments have little incentive to diversify their economies. Alternative income sources are squeezed out. This is known as “Dutch disease”, coined to explain why a huge 1950s gas discovery in the Netherlands destroyed that country’s manufacturing industry.
Governments ride the bubble of an appreciated currency. In many countries, they use the economic bump to placate unhappy or disenfranchised parts of their population by subsidising basics, providing welfare payments or large public works projects.
“Now when prices fall,” says Mabey, “there is a high risk of instability because you’ve squeezed out other alternatives for them to move to.”
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Saudi Arabia’s sovereign wealth fund can last eight years with low oil prices, the country’s former lead climate negotiator Mohammad Al Sabban told the BBC last year. In a future of electric vehicles and hyper-efficiency, what happens when those cash reserves peter out?
“It is a non-trivial security threat,” says Mabey. “Imagine Saudi in 15 years time with a lot of disgruntled young men and Isis and Al Qaeda running around fomenting threats against the regime and they can’t afford to pay for such an elaborate security apparatus as they have now.”
During the build up to (eventually catastrophic) UN climate talks in 2009, al Sabban provoked international scoffing by claiming that the oil-soaked kingdom needed support to ease the pain a new climate deal would cause. The talks were, he said, “a matter of survival” for the country, “we are among the most vulnerable countries, economically”.
Verbeek says that time may prove al Sabban correct. “In a way you could say that they raised [this issue],” he says. But experts on Saudi Arabia have told Climate Home that the transition there is making its first, faltering steps. We discuss it in more depth here.
The protests in the Middle East and North Africa that lead to the Arab Spring were closely correlated to rising food prices. Which occur in countries where oil revenue plummets (Source: Lagi et al, 2012)
With its huge wealth in natural gas in particular, Russia has also been shaken by the downturn. But Vladimir Putin remains publicly bullish about the future for his major export.
“We are moving towards clean energy and renewable energy resources but we cannot say gas consumption is going down,” Putin told the World Energy Congress Summit in Istanbul in October.
Mabey’s think tank can and does say that – in Russia’s primary export market, at least. The EU’s official line is that gas demand will continue, but E3G reckons that is based on a set of faulty assumptions, particularly around efficiency measures that the union has mandated.
“[Russia] are completely dependent on European [gas] revenues; they cannot diversify their revenues. They are doubling down on investing in pipelines, including in China, of which many won’t pay off because they will be made obsolete by other technologies,” says Mabey.
Some commentators, including Greg Ip of the Wall Street Journal, have noted echoes of the collapse of the Soviet Union, which was sped along by oil price falls during the 1980s.
“The loss of that wealth threatens to scramble the world’s geopolitical order, though there are no signs of that yet,” wrote Ip in 2015.
Efforts to diversify the Russian economy have foundered whenever the gas price has risen, says Ivetta Gerasimchuk, a lead of sustainable energy supplies at the Institute for Sustainable Development.
“There are efforts in Russia to genuinely diversify. But it doesn’t work. The oil and gas industry sucks up capital and labour, because it just gets higher returns,” she says.
Could a failure to address these problems now lead to disorder in the future? On the one hand, in the hard-bitten Russian psyche, recent sanctions and downturn have served to increase rather than diminish Putin’s popularity. “People still remember very difficult economic times, so that whatever is happening now is not that critical,” says Gerasimchuk.
This sentiment was echoed recently by Sergei Guriev in the New York Times who explained Putin’s 80% approval rating during crippling recession thus: “Mr. Putin has rewritten the social contract in Russia. Long based on economic performance, it is now about geopolitical status.”
This may help, in part, to explain Putin’s latest foreign wars, which Mabey suggests are a deeply troubling development looking forward at a long decline for Russia’s gas economy.
Gerasimchuk disagrees, arguing that there are a wide range of factors for Putin asserting himself overseas and “it is not justifiable to describe Russia’s future in black and white”.
“Of course low oil prices and economic meltdown are more likely to trigger change. But what kind of change is difficult to say,” she says.
Other countries, with far weaker economies, are more likely to stumble and perhaps fall á la Venezuela. In August, the oil downturn sent Nigeria’s economy into recession for the first time in 25 years. A recent E3G report notes how it has fed economic instability in Algeria, Libya, Azerbaijan, Colombia and Brazil.
According to E3G, petrocentrism in emerging economies is encouraged by foreign investors. Between 2003 and 2012, the Middle East and North African region’s fossil fuel and non-tradeable sectors received twice as much foreign investment that the non-fossil fuel and commercial sectors.
New oil countries are also tying their future to the lead balloon. Myanmar, Tanzania, Mozambique, Ghana and some Caribbean countries are opening up fields, pouring government revenues into oil-bonded futures.
This is setting up a disaster, says Glada Lahn, resource and energy research fellow at Chatham House. “For some countries, the implications are very serious because they borrowed a lot of money based on expectations of higher commodities prices. That debt will define politics and international relations over the next decade.”
Often these moves are backed by international development finance or export-import banks. A recent Columbia University/Guardian investigation found the US’ export bank had made loans or guarantees of almost $34bn to overseas fossil fuel projects since 2009.
Banks are increasingly taking climate and environmental concerns into consideration, but Mabey says they are unlikely to consider the security threat of a severe and sustained oil price slump when deciding to give public money to countries to develop fossil fuel infrastructure.
“I know it sounds ridiculous, but most of our current policies don’t take this into account,” says Mabey.
Strength in diversity
And yet the disaster, like climate change, is entirely avoidable. Especially in the Gulf, says Verbeek. “It could just as well work the other way around. If they realise this threat and start to diversify the economy and use their massive created wealth for clever, creative investments in new aspects of the economy that could lead into a more diversified and more stable country.”
There is time, says Muniruzzaman, because even the most radical scenarios acknowledge the global wind-down of fossil fuels will stretch into the middle of this century.
“The process of decarbonisation, it is not going to happen overnight. It is going to be a fairly slow process. So they still have sufficient time to think of ways of diversifying and adapting their economy,” says Muniruzzaman.
The Bangladeshi general’s own country is a growing target for oil and gas investment, despite being a poster child for climate vulnerability. This, he says, requires leadership and wise investment from countries that are further along the transition pathway. Because oil investments are initially massive, fiscal windfalls tempting and the pay back comes over decades, decisions countries make now will prepare or condemn them for a future with lower fossil fuel demand.
“There is no dialogue that is happening between fossil fuel dependent economies and countries and the people who are in the forefront of the transformation,” says Muniruzzaman.
Despite the fogginess of the crystal ball and even though they may be an uncomfortable side-effect of the fight against climate change, these security implications for oil-producing countries should not be ignored.
The prospect of seeing the dictators and oligarchs who control the global supply of oil overthrown by their citizens may seem like a positive outcome but Verbeek warns that “the results of the ‘Arab Spring’ should be a warning against too much optimism about popular uprisings”. Rather, he says, this creates an opportunity to break their grasp slowly, democratising and diversifying societies that have been corrupted by oil and oil politics.