It's good to be Vladimir Putin these days. The Russian president can jerk most European countries around without fearing the consequences, thanks to their dependence on his natural gas. Meanwhile, Putin's customers are probably dreaming of the day when they can tell him to piss off. But when they can finally live independently of his resources, international influence won't be the only thing that crumbles for Russia and other petrostates.
I'm not talking about the kind of energy independence that the United States may gain from fracking, or Brazil by exploiting its deep-sea oil reserves. I'm talking about the day when oil and gas are no longer used as fuel for vehicles and heating homes. For governments that depend on petroleum revenue, like Russia's does, it could be a day of reckoning. Recent fluctuations in the demand and prices for oil and gas are just a sneak preview.
Heating and motor vehicles are arguably the two biggest uses for petroleum that are vulnerable to technological change in the years to come. Right now, the United States still uses about two-thirds of its petroleum for gasoline and heating. The rest goes for jet fuel, propane, plastics, and other products that won't necessarily be replaced by electric cars, solar panels, and wind power. As demand for gasoline and oil-and-gas-based heating drop, crude and natural gas prices will probably fall as well. But then those other petroleum-based productswill become cheaper and people will buy more of them, adding back some demand for oil and gas. And of course, the emerging economies growing fastest today will contribute some demand as well.
Nevertheless, it's fair to assume that revenue from selling oil and gas will decline within a few decades in countries that are unlikely to find much in the way of new reserves, like Nigeria and Saudi Arabia. Other industries linked to petroleum, such as chemicals and refining, may suffer as well.
What will this mean for the future of the petrostates? In many of them, the governments are dependent on revenues from oil and gas. Two years ago, the International Monetary Fund (IMF) published a paper on budgeting with extractive industries that included a version of the following graph:
Click to enlarge.
Twenty countries depend on petroleum for at least half of their government revenue, and another 10 are between half and a quarter. These countries are clearly vulnerable to big changes in the price and quantity of oil and gas that they might sell. But which ones would have the hardest time coping?
One factor that will affect them is the diversification of their economies. In countries where petroleum is responsible for a lot of revenue but not much of overall economic output, there is at least the possibility of broadening the tax base. Starting with Qatar in the graph above, all the countries depend on petroleum for less than a fifth of gross domestic product. But some of them are lousy at collecting taxes, which is the revenue they'll rely on when earnings from oil and gas decline.
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According to estimates compiled for 2005 to 2007 by Andreas Buehn of the Utrecht School of Economics and Friedrich Schneider of the Johannes Kepler University of Linz, the shadow economy — or black market — may make up more than half of Nigeria's GDP, and more than 40 percent in Chad, Russia, Myanmar, and Ivory Coast. (Of course, this may be part of the reason why petroleum revenue accounts for so much of their governments' budgets.) Recovering from a dent in government revenue would be especially tough for any of them.
Moreover, several of the countries that depend so heavily on petroleum do a poor job of providing public services even with the revenue it brings. Of the five countries with the narrowest tax bases, four — Chad, Ivory Coast, Myanmar, and Nigeria — rank in the bottom 20 percent globally for government effectiveness in the World Bank's Worldwide Governance Indicators.
Were oil and gas prices to dip sharply, these countries might well collapse altogether.
That's also the verdict of the Fragile States Index published annually by Foreign Policy, especially for Chad, which ranks as the sixth most fragile state in the world. Ivory Coast is 14, Nigeria is 17, and Myanmar is 24.
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So what can these countries do to bolster themselves for the future? For one thing, they might try to use their petroleum revenues to diversify their economies. Yet there's little precedent for that actually happening. In the three decades from 1983 to 2012, no country that ever got 20 percent of its GDP from oil and gas — according to the World Bank's figures, which differ slightly from the IMF's — substantially reduced those resources' share of its economy. The shares typically rose and fell with prices; there were no long-term reductions.
The least diversified countries at the moment, with at least 40 percent of GDP from oil and gas, are the Republic of Congo, Kuwait, Libya, Saudi Arabia, Iraq, Gabon, Angola, and Oman. (East Timor may also be among them, according to the IMF figures, but the World Bank has no data on it.) For most of the Arab Gulf states, this may not be too worrisome; their sovereign wealth funds are copious, so they have some room to maneuver if energy prices dip. But for the others, there is little flexibility:
If Chad, Ivory Coast, Nigeria, and Myanmar are vulnerable in the short term to fluctuations in energy prices, then Republic of Congo, Gabon, Angola, and Iraq are looking at potential trouble in the long term. It won't be easy for them to transform their economies for a post-petroleum world. The sooner they can get started, the better.