Algeria stands at a critical stage in its economic trajectory. As a top global exporter and Africa’s leading natural gas producer, hydrocarbons support Algeria’s economy, underwrite its social contract and its geopolitical weight: Its economy is heavily dependent on hydrocarbons, making up 90.8% of exports and 47% of fiscal revenue, equivalent to $50 billion in 2023. This leaves the country highly exposed to external shocks, including geopolitical risks, the European Union’s climate policies, the global energy transition and declining long-term demand for natural gas.
Youth unemployment remains alarmingly high at 30.8% in 2024, with 39% of the workforce in the informal sector. Public spending continues to rise, yet diversification efforts lag due to a constrained private sector, weak institutions and unclear long-term planning.
The country holds the world’s 10th-largest proven natural gas reserves, with 159 trillion cubic feet of natural gas and 12.2 billion barrels of proven oil reserves, accounting for 2% of global output. Yet, despite its vast resources, Algeria’s energy sector underperforms due to ageing infrastructure, regulatory constraints and a nationalistic investment environment that deters foreign capital.
Meanwhile, the domestic energy burden is growing: in 2023, Algeria consumed 60 bcm of gas and 400,000 barrels of oil per day, with a 5% average growth per year, which accelerated to 6% over the last 5 years. Industrial demand, including the mining and steel sectors, continues to rise, straining resources and limiting gas available for export.
Algeria’s heavy reliance on fossil fuels for electricity production, with gas accounting for over 97%, exacerbates its vulnerability to global market shifts and domestic supply pressures. The lack of progress in electricity utility reform, independent power producer (IPP) frameworks and grid modernisation further compounds the risk of stagnation. Despite an ambitious renewable energy and hydrogen agenda, structural issues, such as complex regulations, the absence of power purchase agreements (PPAs) and a shortage of skilled workers, have stalled progress. Renewable energy accounts for less than 3% of installed electricity capacity, even though Algeria has significant solar potential and ambitious renewable energy targets.
Subsidies exacerbate these structural weaknesses. Algeria maintains some of the lowest global prices for fuel and electricity, encouraging overconsumption and crowding out alternatives. Overall, $17 billion is spent annually including on housing, water, electricity, gas, cooking oil and food, equivalent to 6% of the GDP in 2024.
The road ahead for Algeria is beset with challenges. The consequences of delaying economic and energy diversification are severe, risking economic instability, stranded assets and a decline in geopolitical leverage. The European Union, Algeria’s primary gas customer, is actively reducing gas demand as part of its decarbonisation strategy, as such posing a direct threat to Algeria’s export revenues and government spending, which are closely interlinked. Continued reliance on gas risks stranding Algeria’s energy assets while locking the country into carbon-intensive infrastructure. Overall, the country remains highly vulnerable to external shocks, particularly fluctuations in global energy prices and changes in European energy policy.
Hydrocarbons, exports and fiscal dependence
Hydrocarbons are the backbone of Algeria’s economy, contributing the bulk of export revenues. These revenues support public wages, subsidies and infrastructure, forming the basis of a social contract that trades economic benefits for political stability. Despite a strong hold of $75 billion worth of foreign reserves and exceptionally low public debt of 2% of gross domestic product (GDP).
The risks of this fiscal model are already visible. In 2023–2024, Algeria recorded a budget deficit 2.5 times higher than a year earlier. Continued high spending, youth unemployment above 30% and sluggish non-hydrocarbon exports amplify the urgency of transition.
Furthermore, Algeria’s investment climate has grown increasingly uncertain. This is highlighted by the underwhelming participation in recent hydrocarbon licensing rounds and the exit of major international oil companies like BP and Equinor due to regulatory and profit-sharing challenges. Additionally, the government has reversed efforts to promote renewable energy through power purchase agreements (PPAs). These reversals undermine investor confidence and hinder Algeria’s ability to attract the capital required for its energy transition.
Missed integration and a fragmented transition vision
Algeria’s energy strategy suffers from fragmentation and a lack of long-term coherence. While ambitious hydrogen and renewable energy targets exist on paper (Algeria plans to produce and export 30 to 40 TWh of green hydrogen and its derivatives by 2040[1], as well as achieving a target of 27% of electricity from renewables by 2035), implementation remains stalled by unclear regulations, centralised government and inconsistent investment signals.
One major setback in regional energy integration was the deterioration of Algeria-Morocco relations, due to the non-renewal of the transit contract, rather than a contract breach, which led to the 2021 closure of the Maghreb-Europe Gas Pipeline (MEGP). Once a critical artery supplying Spain through Morocco, the pipeline’s shutdown not only reduced Algeria’s export flexibility and revenues but also undermined its prospects as a reliable energy partner. Spain, once a major importer of Algerian gas, halved its share of imports from Algeria by 2022 compared to 2015. This decline has coincided with an increase in Spain’s LNG imports and diversification of its suppliers, eroding Algeria’s market position.
Italy consistently receives the largest individual share of Algeria’s gas exports, ranging around 35-45% of total volumes. Yet, the volumes have not been consistent. Following the Russia-Ukraine conflict, Algeria’s pipeline exports to Italy rose sharply as Italy moved to reduce its reliance on Russian gas. However, this figure fell from 44% in 2022 to 36% in 2024. In contrast, the European Union’s gas demand trajectory is increasingly defined by climate policy, not just market forces. With a binding target to reduce gas demand by 2030 and over 80% by 2050, the EU’s REPowerEU plan and Carbon Border Adjustment Mechanism (CBAM) represent structural shifts that Algeria cannot ignore. European energy buyers are now prioritising low-carbon supply chains, methane management and long-term decarbonisation. These trends will marginalise exporters unable to align with evolving climate and environmental standards. Yet, Algeria has not articulated a comprehensive long-term energy transition roadmap that integrates domestic sustainability with changing export market realities. This absence leaves Algeria exposed to global market volatility and erodes its strategic bargaining power in the emerging energy order.
To navigate this new landscape, Algeria will need a clearly defined, multi-decade energy transition plan anchored in economic diversification, institutional reform and international integration.
NOTE
[1] Republique Algerienne, Strategie Nationale De Developpement de l’Hydrogene en Algerie, 2023.
Photo by aboodi vesakaran
