Outlook for Producer Economies

World Energy Outlook Special Report
In this report

For resource rich-economies, the high reliance on hydrocarbon revenues, coupled with the risk of fluctuations in prices, creates well-known pitfalls. The current market and policy environment is adding to these uncertainties, with questions surrounding the impact of the shale revolution in the short term, along with longer-term structural questions about the outlook for demand. In response to these changing conditions, many major producers are displaying a renewed commitment to reform and economic diversification. This analysis provides a comprehensive assessment of how the prospects for major oil and gas producer economies evolve in various scenarios to 2040. The report assesses the impact of different price and demand trajectories on revenues from oil and gas in several key producer economies; explores the ways in which the energy sector can help mitigate vulnerabilities and support economic diversification; and examines the potential implications of different pathways for energy markets, global environmental goals, and energy security.

The drive for energy efficiency and the long-term response to climate change, in addition to technology innovation and the shale revolution in the United States, are all pointing to sustained pressure on economies that rely heavily on revenue from oil and gas.

Outlook for Producer Economies focuses on what these changes could mean across six key countries: Iraq, Nigeria, Russia, Saudi Arabia, United Arab Emirates & Venezuela.

Key findings

The fall in oil prices that started in 2014 brought into sharp relief some risks associated with high dependence on hydrocarbon revenues - the net income available from oil and gas has fallen by between 40% (in the case of Iraq) and 70% (in the case of Venezuela), with wide-ranging consequences for economic performance.

Net income from oil and gas for selected producer economies, 2010-2017

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Major swings in hydrocarbon revenue can be disruptive if finances and economies are not resilient.

The volatility of revenue can result in pro-cyclical spending. The upside of a rise in expenditure in the boom years is followed by an abrupt contraction when prices fall, with damaging consequences for the broader economy.

Fiscal expenditure in Iraq, 2010-2017

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There are multiple uncertainties affecting the outlook for oil and gas and the revenue flows that sustain producer economies, not only because of fluctuating prices but also because of questions concerning longterm demand. A series of scenarios points to a range of possible futures for producer economies.

The New Policies Scenario (NPS) provides a measured assessment of where today’s policy frameworks and ambitions, together with the continued evolution of known technologies, could take the energy sector in the period to 2040. Under the NPS, equilibrium prices for oil and natural gas rise gradually and though the pace of oil demand growth slows markedly, there is no peak in global consumption.

In comparison, under the Low Oil Price Case (LOP) the oil price settles in a range between $60-70/barrel. In terms of demand, the LOP assumes a more rapid uptake of efficiency measures and fuel-switching opportunities than in the NPS, notably for electric vehicles.

Finally, the Sustainable Development Scenario (SDS) stress tests the future of producer economies in a different way. Prices are low in this scenario, but volumes are also hit as oil demand peaks in the near term and then declines to around 70 mb/d by 2040, while natural gas consumption rises by only one-quarter the amount projected in the New Policies Scenario.

Looking at projected income from oil and gas to 2040 starkly highlights the difference in these three possible futures.

Net income from oil and gas by scenario and per capita, 2010-2040

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Net income from oil and gas per scenario, 2010-2040

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So what can producer economies do to prepare for this range of possible futures?

A central task is to develop more diversified and dynamic economies that are less dependent on oil and gas revenue. The tendency to recycle these revenues into relatively unproductive jobs on the public payroll helps to explain why labour productivity in major producer economies in the Middle East and North Africa (MENA) has fallen below that of their peers, in some cases even lower than levels in 1970.

The strain on existing development models is compounded by demographic pressures - for example more than 50 percent of the population living across the Middle East is under the age of 30; the proportion is above 70% in Nigeria. Income from oil and gas will not be sufficient to create opportunities for all those looking to enter the workforce.

Labour productivity in selected MENA countries, 1970-2015

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The reform agenda for producer economies is much wider than energy - a major purpose is to expand opportunities across other sectors of the economy. That said, overall reform efforts stand to benefit significantly from a well functioning energy sector, which can provide an effective platform – both in terms of revenue and comparative advantage – for achieving broader social and economic objectives.

Outlook for Producer Economies 2018 outlines six areas in which the energy sector can help:

  • Capturing more domestic value from hydrocarbons, by investing further downstream in refining and petrochemicals.
  • Using natural gas strategically in support of diversification goals: gas is less lucrative than oil, but it can underpin an industrial strategy in a way that oil cannot.
  • Tapping the huge, under-utilised potential of low-carbon energy. There is huge scope to increase cost-effective deployment of renewables and nuclear power (in some countries).
  • Phasing out subsidised consumption of fossil fuels: pricing reform, combined with a push on energy efficiency, can reduce wasteful consumption while retaining an economic advantage from energy
  • Ensuring adequate investment in the upstream: the ability to maintain oil and gas revenues at reasonable levels provides an important element of stability for the economy as a whole Supporting advanced energy technologies: many producers have world-leading expertise that can support innovation and reduce the environmental footprint of oil and gas supply.