Rising fuel prices: The not so obvious political risk in energy markets

Oil and gas markets may be underestimating the level of political uncertainty among some of the biggest energy producers. And the risk stems from the very thing that many governments in these countries are trying to engineer, higher prices. Except that now, higher energy prices, far from just helping to fill the government coffers are now starting to hurt the ordinary people that have come to rely on the goodwill of their governments.

The reason? Well, previously, authoritarian governments had attempted to placate their citizens through subsidies on everything from energy, food and many other daily staples. The decline in oil prices starting in mid-2014 prompted many oil producing nations to reform their subsidy systems, reasoning that in a ‘lower for longer’ world they had no choice to reduce or eliminate the payments and that the fall in prices presented a golden opportunity for them to do so without their citizens noticing.

One of the countries that is currently flying under the radar at the moment is Algeria. But that might not be the case for long.

The IMF warned Algeria in May that it needed to reform its generous subsidy system and shake up its bureaucracy. The country’s oil stabilization fund – a rainy-day account – had shrunk sixfold in three years to 740 billion dinars, about $7 billion.

Since the start of 2017 there have been several street riots in some northern cities, as local citizens protest against increased taxes, imposed at the start of the year to compensate for lower oil revenues.

Algeria is the leading natural gas producer in Africa, the second-largest natural gas supplier to Europe outside of the region, and is one of the top three oil producers in Africa. Algeria gets about 95% of its export revenue from oil and gas sales and needs prices as high as $87 a barrel to cover government spending. The OPEC nation currently produces some 1.2 million barrels per day.

Oil money has been the driving force behind vast national spending on social programs here. President Abdelaziz Bouteflika has long directed subsidies to fuel costs, food and cheap housing, helping him maintain his 17-year, military-backed grip on power.

The sharp rise in violence seen over the past week is similar to that in Algiers at the start of 2011. At that time the uprising was described as the “bread and sugar” riots (two products subsidised by the state) in protest against the increase in the price of basic products.

In other countries in the region, similar challenges led to the fall of regime after regime during the tumultuous Arab Spring in 2011. That the Algerian government was able to escape a similar fate was due largely to widespread fears that a major political and economic upheaval would trigger a civil war similar to the one that ravaged the country during the so called “Black Decade” of the 1990s. The government was also able to placate its restive population with subsidies, government jobs, and public sector pay increases – all financed, of course, by oil.

Even if oil prices stay around current levels, the Algerian government will, at some point, no longer have the resources to support even its scaled back patronage schemes. This could lead to even more instability, potentially ending in an Arab Spring-type uprising.

Algeria only has to look across to its eastern doorstep to see what could happen if the country collapses. Libya has been beset by political uncertainty since 2011 and despite recent improvements in the amount of oil produced still remains a high political risk.

Algeria is no stranger to disruption to its energy infrastructure. A deadly hostage-taking at a gas plant in 2013 left 40 people killed during a four-day siege at the Tiguentourine gas plant in In Amenas, near the Libyan border. Just as lower oil revenues means lower subsidies it also means that governments like Algeria that are dependent on oil revenues have less money for security to protect energy facilities.

Related article: Oil prices: The top 10 most important drivers

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Peter Sainsbury

Materials Risk provides commodity market insights across your supply chain by highlighting emerging risks and opportunities and providing advice on commodity buying and managing risk. All views expressed on this website are those of Materials Risk only. See our About page and terms and conditions for more details. Materials Risk was founded by Peter Sainsbury who you can follow on Google+ and Quora