The energy industry is one of the most volatile sectors you could invest in. One of the most important factors that affect the industry is also one of the most unpredictable: Political unrest. Given the amount of oil that is produced by OPEC of which many members are nations with precarious political positions that are often subject to revolutions or general unrest. Currently, there is one OPEC nation subject to political upheaval that may harm the bottom line of many international energy companies; and that country is Algeria.
Algeria is the largest OPEC member by territory and the largest country within Africa. The country achieved independence from France in 1962 and has since then transitioned into an oil-based economy with $22 billion in oil exports per annum and 12 billion barrels of oil in their proven reserves. The oil produced from the country is notably light and sweet, comparable to the U.S. Eagle Ford crude in its sulfur content and only slightly denser. Algeria is a heavily based on their oil earning, with 30% of their GDP and 95% of their export earnings coming from oil, most of which goes into the EU which has been their largest trading partner since 2002.
To set the stage for the political unraveling of Algeria, it's important to know that it's a socialist country with citizens used to all-encompassing social welfare programs. The issue with having an oil-dependent socialist country became apparent during the oil crash of 2014. When the global price of oil fell dramatically Algeria faced a drastic drop in revenue, and given the expansive and expensive social welfare programs, Algeria found itself struggling to balance its budget. Oil prices remained low for two more years keeping Algeria in strife. There is a historical basis for the assumption that a drop in oil prices will result in political unrest in Algeria. In the 1980s when oil was still at rock bottom due to the oil glut, Algeria faces countless violent protests due to the lack of money for social programs.
In 2019 oil prices had greatly rebounded yet, Algeria found itself in the same situation it was in during the 1980s riots. This is because, although prices have risen OPEC nations have all agreed to cut supply, including Algeria; leaving it with a high enough price to pay for their programs but not enough quantity to sell. Even without the money from their oil exports, the Algerian government declined to shut down the social welfare programs and instead funded them with the money from the country’s foreign exchange reserves. These reserves have since depleted 50% from their 2014 levels; leaving Algeria to begin print money to pay for its social welfare programs. Leading to rampant inflation.
Do to the perceived mismanagement of the budget many grassroots protests have since emerged calling for a change in leadership. Specifically calling for the resignation of President Bouteflika who has been in office for four consecutive five-year terms. As of this week, this has been achieved, President Bouteflika has agreed to resign by April 26th. While this may seem to be an end for the political strife in the nation, it is more likely just the beginning as the president has left a not clear successor to take his place. Leaving political certainty at an all-time high. With expatriation of oil reserves being a significant risk given the country’s outspoken and dissatisfied military elite.
Now how does this effect, the energy market as a whole? Both major and independent Oil and Gas companies have exposure to Algeria, and as political unrest and instability increases the projects likelihood of projects underdevelopment being halted. One example of this would be Exxon’s plan to develop a natural gas field in Algeria which were halted do to the political unrest. Moving forward it would be wise to avoid companies with significant exposure to Algeria, in either current projects or developing ones until the political unrest has been settled.
By the Baruch IMG Energy Team