In cities across the world, skies are clear of smog and fumes. A third of humanity remains indoors, seeking to elude the coronavirus. Few are riding buses or driving cars. Birdsong has replaced plane noise. People are consuming so little oil that for a while last month, U.S. traders had to pay people to buy their oil.
A hastened transition away from fossil fuels means that humanity may avoid the very worst of a changing climate. But what does it mean for lower-income countries whose economies rely on resource extraction? Over the coming months, NRGI will convene diverse expertise to examine this question.
Two of Africa’s natural resource giants offer potent illustrations of the looming challenges. The fate of these two countries matters. In ten years’ time, the World Bank projects that more than a third of people suffering extreme poverty worldwide will live in Nigeria and the Democratic Republic of Congo.
Oil-rich countries on slippery ground
After more than six decades producing oil, Nigeria remains heavily dependent on the industry. Oil accounts for most of the country’s exports and contributes three-quarters of government revenue. This dependence brings challenges. Nigerians’ incomes has not recovered since the last slump in oil prices in 2014. The coronavirus now hits the country with a new and more severe slump. Despite being better placed than some other emerging economies, the country is already struggling to repay $108 billion of sovereign debt.
The current crisis is a window into one possible future for Nigeria and other oil-dependent states. A global energy transition will leave oil-dependent states like Nigeria with less money. Yet, on top of this, the climate emergency will be and is already felt most keenly by Nigeria and many other developing countries in the form of floods and droughts. This is likely to only worsen as the planet continues to warm. Oil-rich developing countries are stuck between the “rock” of economic ruin and the “hot place” of environmental catastrophe.
It is not too late for governments in oil states to tackle these challenges and prepare their economies for transition—but some countries are headed in the wrong direction. Executives at many state-owned oil companies want to prove that they can become world-class profit machines, just as international oil companies did in the 20th century. Such lofty dreams come at a price. For every four dollars of oil money the average national oil company collects, it remits only one to the government which can then use that dollar to pay for health, education or moving the economy away from oil dependence. Most of the rest remains invested in oil.
Such loyalty to oil seems questionable by many measures, including the stock market’s. Over the ten years preceding the current oil price crash, the average share price of publicly traded state oil companies declined by 20 percent. Over the same period the value of the S&P 500 index of large companies in the U.S doubled. In addition, many prominent NOCs have accumulated debts equivalent to more than five percent of their countries’ annual economic outputs. When a state company fails, government officials may feel compelled to bail it out, or otherwise risk a financial crisis that threatens the country’s economy. Between bailing out the Nigeria National Petroleum Corporation and falling tax revenues from the oil sector, Nigeria’s government and others like it may be unable to pay for public services at all. No one knows how quickly the global economy will transition, there may be time to make more money, but betting public money on state oil companies is looking increasingly risky.
A winning transition for the mineral-rich?
While economies dependent on oil would suffer if the energy transition takes hold, countries with minerals critical to the manufacture of electric vehicles, batteries and wind turbines may see booming demand. The Democratic Republic of Congo is another less-developed country; its meagre public services rely not on oil but hard minerals, including cobalt. The metal is currently a necessary ingredient in the battery chemistry of clean electric vehicles. By 2050, if battery manufacturers do not find an economic alternative to cobalt, the World Bank reckons the world will need five-times current production to feed the energy transition.
Rising demand for cobalt might be great for the mining companies with projects in DRC, and theoretically for the Congolese state. Yet the DRC’s successive governments have a poor track record when it comes to collecting and managing revenue from the sector. Beyond weak financial management, corruption, human rights abuses and environmental degradation persist in mining there. In these circumstances, a minerals boom propelled by an energy transition could be wasted. Congolese citizens would again lose out. Mining companies and officials in DRC must develop sustainable investment on beneficial terms and the state must better manage the revenues it brings.
How the DRC, and other mineral-producing developing countries, govern mining also matters for the world. There is likely enough cobalt and other needed minerals in the earth, but there are obstacles to finding, extracting and processing more of them. Good governance—such as rules guarding against corruption, protection of workers and communities, and trust-building transparency—attracts investors who can find more mineral deposits, and helps safeguard supply chains. Yet, over four-fifths of cobalt is produced in countries with less than satisfactory governance of the extractive sector, according to the Resource Governance Index. Better governance—particularly of cobalt mining—could increase the supply of minerals for the energy transition.
A new commentary series
The difficulty of navigating transition is hardly exclusive to Nigeria and DRC. From Mexico to Mongolia, from Ghana to Guyana, governments must address the unknown future of energy markets. As the world recovers from the pandemic and continues to transition toward renewable energy, city skies may remain relatively clear. But how resource-producing countries manage the decline in fossil fuels is critical, especially after the shock of the economic and health crisis.
That is what we’ll tackle in our commentary series “Resource Governance and the Energy Transition,” designed as a resource for policy-makers and activists within resource-rich countries, and the international movement of researchers, partners and donors who support them. It will also demonstrate why the success of resource-rich economies – and the well-being of the people living in them – is crucial for the success of the energy transition. Experts from around the world will tackle topics such as: how evolving transparency policies might expose climate-related financial risks, the resilience of state companies, and the political economy of gas and renewable energy.
To learn more (or if you would like to contribute to the series yourself) contact us at nrgi[at]resourcegovernance.org.