Algeria feels squeezed by falling energy prices

Algeria feels squeezed by falling energy prices

With an economy heavily dependent on oil, Algeria has launched a series of measures to secure falling revenues.

Within OPEC, Algeria, perhaps more than other of its oil-producing members, is experiencing the fallout of declining oil prices.

In July alone, the average price of an Algerian barrel of oil lost more than 5 USD. In the same period, the country produced 1.1 million barrels per day, and further boosted its production of crude oil by 32,000 bpd. This is due to the opening of the Bir Sebaa and Bir el Msana oil fields, located in eastern Algeria.

The government is now under pressure to introduce austerity measures and dip into foreign reserves to cover demand for imported goods. 60% of Algeria´s budget is dependent on energy, which is set according to a rate of $60 per barrel.

Algeria has started to reduce its budget, as energy revenues are only expected to reach $34 billion, versus the $60 billion it was expecting to generate. It is estimated that Algeria’s budget deficit could reach a staggering $30 billion by the end of the year.

In an extraordinary move, on August 10, the country launched a tax amnesty, set to expire in December 2016, to improve government finances and salvage part of the $4 billion Algiers estimates it loses through tax fraud and evasion.

External Factors  

In response to falling prices, OPEC’s most prominent members, Saudi Arabia, Kuwait, and the United Arab Emirates, have expressed their determination to increase production in order to preserve their market share.

One cannot ignore the fact that North American oil has succeeded in side-lining the powerful organization, which once could bring the global economy to its knees by altering production. In July, OPEC´s members pumped 31.51 million bpd, which is estimated to be its highest level since May 2012.

OPEC’s Secretary General, Abdullah al-Badri dismissed any suggestion of decreasing supply to increase prices, saying OPEC expects rising demand to bolster prices. However, Algeria’s own energy minister, Salah Khebri, announced that, in light of improved Iranian-Western relations, by December, there will be a glut of oil in the market place.

The future

Even during the dark decade of the 1990s, when the country was rocked by frequent terror attacks, Algeria managed to attract foreign investors to the country.

The government succeeded to protect the legions of foreign workers and contractors who came to work in the southern and eastern gas and oil-rich regions. According to University of Nebraska Professor James D. Le Sueur, from the late 1980s until 2000, at least 27 companies from 20 countries set up operations in Algeria under contracts with the Algerian government.

In recent years, the number of foreign investors has slowed. The hostage crisis in early 2013 at the Tigantourine gas facility acted as a nasty wakeup call that even the most secure of energy installations are vulnerable.

Furthermore, in early August, it was reported that security guards working for the state oil company Sonatrach in the southern regions of Ouargla and Illizi launched a series of protests over working conditions. This only further whittles away at foreign investor confidence.

Algeria, like many OPEC members, has fallen into the trap of assuming its natural energy resources will be the economy’s engine for decades to come. Algeria’s economy is heavily lopsided, with reliance on oil and gas having stifled diversification. Moreover, unemployment remains a constant headache for the Bouteflika government, which has responded by promising to spend more on housing and food subsidies.

Unfortunately, reality always catches up, and Algeria´s central bank is concerned that if the price of oil stays low the country’s foreign exchange reserves could diminish. Despite these warnings, Sonatrach announced late last year that it intends to invest $90 billion over the next five years in oil and gas development.

As of now, there is little to indicate that such an undertaking will improve Algeria’s competitiveness as a hydrocarbon producer.

About Author

Emily Boulter

Emily Boulter is a Rotterdam-based writer, who is also the creator of the current affairs blog "From Brussels to Beirut". Previously, she worked as an assistant for the vice-chair of the foreign affairs committee in the European Parliament.