The hydrocarbons sector is at a turning point. Low prices and uncertain projections, competition for market share, geopolitical dynamics, growing environmental and social concerns, and questions about the future of fossil fuel and renewable energy sources necessitate analysis and discussion about the present and future of the industry and the challenges it is facing and will face in the future. At the 2015 Asociación Colombiana de Petróleo Conference, “New Thinking on Oil and Gas”, the Dialogue’s Energy, Climate Change & Extractive Industries Program Director, Lisa Viscidi, spoke about the challenges associated with sustainable economic development in countries that derive significant portions of their revenue from the hydrocarbons sector.
Oil dependency makes countries more vulnerable to swings in international oil prices. Countries with high oil dependency, such as Saudi Arabia, Kuwait, Qatar, Nigeria and Venezuela have suffered large fluctuations in terms of trade while countries with more economic diversification, such as the US, China and Mexico have enjoyed more trade stability.
Oil dependent countries are also highly concentrated in primary rather than manufacturing exports and are particularly vulnerable to Dutch disease, which refers to the increase in value of a country’s currency related to a high concentration of exports of commodities such as oil, making other exports less competitive. Governments can employ different tools to smooth out spending in the face of large fluctuations in oil prices. Viscidi cited sovereign wealth funds, such as Norway’s Government Pension Fund, fiscal rules, such as Chile’s Fiscal Responsibility Law, and hedging exports, as the Mexican government does, as examples that have proven successful in managing commodity price volatility.
Local conflicts over natural resources is another important challenge facing the hydrocarbons sector, Viscidi points out in her presentation. The reasons behind protests vary greatly by country, but the majority are tied to economic demands, land rights or environmental concerns.
To mitigate local conflicts, Viscidi suggests increasing government intermediation, expanding human capital development to enhance benefits for local communities, using local content requirements as an opportunity to create jobs and develop local supply chains, improving and upholding environmental regulations and investing in sustainable projects that promote long-term local economic development.
Full PowerPoint presentation below.