Are Credit Rating Agencies Punishing Petrostates for Energy Transition Risks?

The energy transition is expected to leave fossil fuel producers with weakened economies and stranded assets, but the time horizon of these effects is uncertain. This article offers a window into these effects by studying the sovereign credit ratings of petrostates. Credit ratings are both forward-­looking indicators of their economic outlook and determinants of petrostates’ ability to raise capital, and may thus already reflect concerns about the energy transition’s anticipated effects. Using data on sovereign credit rating decisions, this article studies changes in petrostate ratings over time. We find some signs that they are declining, but also that this is not primarily the result of systematic downgrades. For the time being, credit rating agencies are instead rewarding petrostates less for high oil prices and punishing them more for low levels of economic diversification. The short-­to-­medium term risk horizon of rating agencies means that future downgrades could come suddenly and steeply.