x Abu Dhabi, UAESunday 23 July 2017

In Algeria, declining oil prices complicate the future

Low oil prices are bringing back memories of previous crises in Algeria's finances, writes Abdelkader Cheref.

With oil prices at their lowest in five years, North Africa’s hydrocarbon giant Algeria is feeling the pinch. Photo: Anis Belghoul / AP
With oil prices at their lowest in five years, North Africa’s hydrocarbon giant Algeria is feeling the pinch. Photo: Anis Belghoul / AP

Oil prices will keep on falling in the short-term, according to analysts, undermining the finances of a group of countries heavily reliant on oil income.

But where does Algeria, a member of Opec, sit among this group? The effect of this decline is likely to weigh heavily on the North African country’s economy and its social and political stability.

For now, the Algerian authorities maintain that the country’s foreign exchange reserves can cushion any short-term shock. Yet, the memory of the 1980s oil glut – with its political and social consequences – still lingers in people’s minds.

The 1986 oil price collapse put Algeria on the verge of bankruptcy and triggered riots and instability. The question now is could history repeat itself?

Algeria has the 10th largest reserves of natural gas in the world and is the sixth-largest gas exporter globally. Every $1 drop in the price of crude oil results in a loss of $560 million per year to the country. The hydrocarbon sector accounts for 98 per cent of the country’s total exports and 58 per cent of its total fiscal revenues.  

The decline in oil revenues is likely to cause difficulty for a country that is already experiencing economic and social tension.

Oil reserves helped the Algerian government avoid the worst effects of the 2011 uprisings that spread through the region by offering benefits and assistance to its citizens: the government granted zero-interest loans to thousands of unemployed young men and battalions of public sector employees received a salary increase irrespective of their performance.

However, the current slump in oil prices has complicated matters. The chatter among some Algerians is that Abdelaziz Bouteflika, the country’s president, has squandered Algeria’s oil riches to placate his people and enrich the elite, but has not built an alternative economy to oil.

Corruption has risen too and the Transparency International Corruption Perceptions Index ranks Algeria 100th in its 175-country league table.

That ranking is not helped by the allegations surrounding Chakib Khelil, who held the job of oil minister between 1999 and 2010 and is a close ally of the president. Mr Khelil is wanted by an Italian court in connection with a corruption case involving both Algeria’s state oil company Sonatrach and Italy’s Eni. 

To shore up its revenues by arresting declining production, the Algerian government is encouraging investment in unconventional resources such as shale gas, despite serious reservations from several oil experts and civil society. Nevertheless, the authorities are determined to start shale gas production by 2022.

Besides six shale gas basins that Sonatrach has already listed in the Sahara desert, drilling operations are about to start offshore for the first time.

Critics contend that Algeria’s oil income has been used as a political tool to mask long-term economic mismanagement by the government.

But will the government survive the drop in the oil price?

As one analyst put it: “Authoritarian regimes, although displaying a facade of strength, are fragile in crisis.”

Dr Abdelkader Cheref is a professor at the State University of New York at Potsdam