The Impact of Low Oil Prices on Algeria
Wednesday, October 12, 2016
By Gonzalo Escribano
In a new report by the Center on Global Energy Policy, author Gonzalo Escribano outlines the degenerating security conditions in Northern Africa, raising concerns about the ability of Algeria, an OPEC nation, to weather the resulting economic, political and security shocks, and inviting comparisons between the current situation and the catastrophic events experienced by the country during the 1986-1988 oil price collapse and its aftermath. The paper goes on to discuss the extent to which low oil prices could foster an environment for economic and political reforms, and the benefits that the international community, specifically Europe, could derive from taking advantage of this moment in time to press for new energy policies that improve both supply and overall security.
- There are clear parallels and key differences between what Algeria is going through now and the chain of events that led to the bloody civil war of the 1990s. Algeria is better equipped altogether to weather a market downturn today than it was 30 years ago. While Algeria’s fiscal and current account balances have worsened, its reserves remain substantial (even if rapidly decreasing) and its external debt is negligible. This is in contrast with the late 1980s, when a lack of reserves and high external debt were the two main factors that forced the government to adopt a traumatic shock-therapy approach to stabilization.
- Despite the decline in oil and gas revenues, the Algerian economy has continued to grow during the current low price environment and has been able to avoid an economic recession like the one experienced in 1986-1988. This gives Algiers more short-term policy space to control the pace and depth of austerity and reform measures. The memories of the deadly civil war in the 1990s, the outcome of the 2011 Arab revolts and the overall deterioration of regional security, may also moderate the reaction of Algerians toward austerity measures. Critically, the security forces are better trained, informed and equipped than in the past, and defense and security expenses are not being affected by budgetary cuts.
- While a military coup or widespread popular unrest thus seem unlikely in the near term, Europe should nevertheless take note of the risk over the longer term of greater instability along its southern border. The EU should look for ways to engage with Algeria that would benefit not only their mutual energy security but also prevent the creation of further unrest in the region. A good balance would be offering prospects of increasing Algeria’s sales in the EU’s gas market in exchange for improving the country’s energy governance. Low oil prices may have increased the Algerian appetite for reform, including the energy sector, and the prospect of competition from US exports of liquefied natural gas may prove an additional driver for change. Such a window of opportunity may not last long and merits exploration.