The energy transition and export diversification in oil-dependent countries: The role of structural factors

Abstract

The energy transition toward decarbonization is expected to impact producers of fossil fuels. However, oil-exporting countries are currently key players in the modern economy. Thus, the energy transition will not be successful if state revenues in these countries are not stably maintained. These countries can protect themselves against revenue volatility and mitigate carbon risk by diversifying their economies. However, export diversification appears to be particularly challenging for many oil-producing countries. It is natural to ask why some oil-exporting countries have managed to diversify their economies whereas others have not. We hypothesize that the differences in oil producers' diversification patterns may be associated with differences in their structural characteristics. Such differences may cause countries' diversification trends to diverge. To investigate this hypothesis, we examine whether all countries converge toward the same diversification level. We also check whether their diversification efforts diverge overall but create separate convergence clubs. The results show that structural and institutional factors play a central role in the diversification process. In particular, countries with higher quality infrastructure, human capital and research and development efforts are more likely to converge toward high diversification. Thus, these factors provide greater economic stability in turbulent times and promote a successful energy transition.