In November 2013, the United States Library of Congress released a report describing Algeria’s macroeconomic position as “strong” during a month when Brent oil prices cruised at $108.08 per barrel—more than 54 percent higher than this Monday’s price at $49.40 per barrel.
Indeed, buttressed by the elevated barrel prices, the government’s position had been strong at the point of the report’s writing. Estimates by the International Monetary Fund (IMF) said the external debt-to-GDP ratio sat at 1.6 percent in 2013—a strikingly low rate even when the figure is compared internationally with countries more developed than the North African nation.
Since oil was discovered in Algeria in 1958, the “superpower” has used profits from the industry to provide electricity to disconnected villages within its borders and build an intricate social welfare and public sector employment policy. To be fair, these systems have been far from perfect.
Now, with oil prices only incrementally recovering from the steep dip that manifested in the first quarter of 2016, the Algerian system, in which Sonatrach, the national hydrocarbon company, generates 60 percent of revenues and produces almost all of the country’s export products, is being challenged a second time by market forces.
One of the first difficult economic periods in the country’s history came in 1986, when prices fell from $58 a barrel to $22 a barrel in today’s dollars.
The price of oil, and thus government revenues, had recovered since this first “oil glut,” but the worst consequences of the event—increased poverty, exacerbated unemployment and lowered living standards—have been alleviated with limited effect. Algeria has had an unemployment rate of just-under 10 percent or more since at least the 1980s, and widespread poverty continues to reign.
The ongoing second episode of extreme risk exposure to the commodities market coincides with the rise of terrorism in and around Algeria. Though Morocco has not had an attack claimed by the Islamic State (ISIS) within its borders, the government has dismembered dozens of terrorist cells in the country over the past few years, signaling the rise of ISIS sympathizers within the country. Related: When Will Solar Overtake Oil?
Libya, once a stronghold against terrorism and other militancies under Muammar Qaddafi’s dictatorial rule, has seen serious encroachments by ISIS in the coastal city of Sirte and surrounding areas near the Mediterranean Sea.
Tunisia’s Arab Spring-propelled government has also struggled with terrorism. In March last year, ISIS-affiliated gunmen stormed into Tunisia’s national museum and killed 19 people, most of whom were foreign tourists.
When targeting Algeria, terrorists recognize the country’s dependence on oil and target it for its sales to the U.S., Europe, Russia and other foreign countries in its propaganda.
The 18 March attacks on the Krechba gas plant by AQIM (Al-Qaeda in the Islamic Maghreb) was part of the group’s “war on the interests of the crusaders” and an attempt to stop “the bleeding theft of Muslims’ gas and oil.”
The Congressional report cited earlier was distributed almost a year after the Al-Mourabitoun terrorist group claimed responsibility for the attacks on the Tigantourine gas facility—the now infamous In Amenas hostage crisis—and the deaths of almost 40 foreign hostages.
After factoring in these premeditated attacks on oil and gas properties, it can be easy to make conclusions that terrorism, not global oil prices or Algeria’s chronic dependency on hydrocarbons, represents the greatest threat to the country’s stability.
That is not to say that terrorism has had no effect on oil production. The 2013 attack in Tigantourine caused the plant to be closed for several weeks. Even when it reopened, it initially operated at only a third of its full capacity.
Still, the situation is far from comparable to the one in the Niger Delta, where a group of local separatists have been seeking independence from Nigeria by trying to starve the central government of essential oil and gas revenues. Their attacks, which endanger some of Nigeria’s key oil producing areas, have forced the shutdown several facilities, and have contributed to a 40 percent plunge in oil and gas production rates.
The groups active in Algeria are also comparatively less organized than the Niger Delta Avengers (NDA) wreaking havoc in Nigeria.
Al-Mourabitoun, a battalion that was once two separate groups, is currently embroiled in a leadership conflict, tearing it apart along the lines of the fighters’ previous affiliations. The conjoined group’s senior officials cannot seem to agree whether or not they are affiliated with ISIS.
In the meantime, Algerian officials have devised a “new economic plan” to diversify the economy. If it succeeds, the private sector will play a greater role in developing the economy and employing citizens. Related: Iran And Turkey Court The KRG For Oil
Large swaths of the labor force in the hegemonic public sector are at risk of becoming unemployed as the government’s foreign reserves deplete with the continuation of low oil prices.
But if Algeria’s handling of the 1980s crisis serves as any indication, the slow pace of change in the country’s governing institutions will prevent real reform in the private and public sectors.
Even as oil prices slowly climb, the Paris climate change accord—which Algeria has signed—necessitates lower oil and natural gas consumption in order to succeed. In the long term, global demand for the two hydrocarbons will fade, causing trouble for Algeria that will be far more chronic than the current industry downturn.
By Zainab Calcuttawala for Oilprice.com
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