Markets & Policies

Saudi Arabia: the Oil Giant Turns to Solar Power

 

Recently Turki Mohammed Al Shehri, Head of the Kingdom’s Renewable Energy Project Development Office has announced that Saudi Arabia has plans to invest $7 billion in renewable energy projects, mostly taking advantage of its solar potential. In fact, of the 4 GW of renewable energy capacity that Saudi Arabia aims to develop, 3,250 MW will be generated by solar plants and about 800 MW from wind plants.
Compared to the previous year – when the Saudis only tendered 300 MW in solar and 400 MW in wind projects, this is an incredible increase.
In the long run Saudi Arabia aims at developing 9,000 MW of renewable capacity by 2023[1].

The rationale behind this shift in policy is due to both endogenous and exogenous factors.

Saudi Arabia among environmental concerns and internal pressure

Saudi Arabia, in the many efforts put by the international community to safeguard the environment, always showed reluctant to endorse any policy aimed at cutting CO2 emissions that could  penalise the oil industry.
During every session of the IPCC (International Panel for Climate Change) the delegates representing Saudi Arabia fiercely opposed any initiative aimed at decreasing emissions.
It is also true that during the Cop21, when the international community agreed to maintain the increase in global temperature within 2 Celsius degrees, Saudi Arabia pledged to achieve a 130 million tonnes of CO2 reduction.
Despite this effort, the Saudi kingdom can hardly be depicted as environmentalist.
The willingness to avoid being completely isolated by the international community is coupled with much more materialistic concerns.
Understandably, of economic nature.

The instable oil market

The global oil market has been shaken since 2014, with prices reaching $30 a barrel thus putting under severe pressure those countries heavily reliant on oil to support their economies.
Saudi Arabia is among them, despite having very low production costs.

Notwithstanding the fact that prices are more stable today, with Brent being around $75 a barrel, lower prices compared with a few years back pushed Saudi Arabia to maximise the revenue of exports more than ever.

Why is the quintessential petrostate really transitioning away from oil?

Today Saudi Arabia is the world largest exporter of oil and holds 22% of global proven oil reserves[2].

The sale of crude has granted the Kingdom abundant revenues and decades of prosperity, along with enormous power to influence the pace of the global oil market.
As the leader of Opec – that is the most powerful oil cartel in the market – Saudi Arabia has acted as the swing producer, meaning that country able to meet shifting global demand by adjusting its production level.
The power of this country resides exactly there, in the extraordinary spare capacity it holds, that however is now jeopardized by some internal factors that can easily and rapidly erode it.

The problem is that as many hydrocarbon rich countries, Saudi Arabia does not use its reserves in the most rational and optimized manner.
Most of its electricity is generated by burning oil and the majority of power plants are inefficient, as are the air conditioners, that in 2013 consumed 70 percent of the kingdom’s electricity.
Given that Saudi population only amounts to 32 million people, it is striking that the country is the six world largest oil consumer.
However, according to the national statistics institute GaStat, the Saudi population in 2017 has increased by 2.52% compared to the previous year.
In a report dated 2011 the Chatham House had already forecasted that if the trend does not change, domestic consumption will cause the country to become a net importer by 2038.
This is an alarming signal that energy policies need to change quickly.

Not only domestic consumption is eating relevant portions of oil production but is also doing that in a very expensive way. Subsidies are huge in Saudi Arabia and Saudi Aramco is forced to sell oil domestically at $5 a barrel.
The same oil could be – much more conveniently – sold on the global market, allowing higher revenues.

A forward-thinking strategy

Since 2014, when the oil price plummeted reaching $ 30 a barrel, many argued that Saudi Arabia had lost its power to influence the oil market. And when Saudi Arabia decided not to intervene for many months, many argued that it was giving up its leadership.
Well, it does not seem so.

To diversify the energy mix away from oil will be beneficial in many ways.
First of all, it can make Saudi Arabia much more resilient to the fluctuations of the global oil market, decreasing the dangerous dependence on that single source of revenues.
Secondly, it would allow to decrease the share of oil used for domestic consumption, that can be diverted to exports, allowing higher profits.
And thirdly, solar technology can easily be exported, thus creating high-tech jobs to address the problem of unemployment, especially affecting the younger portion of the population.

As in the past, Saudi Arabia is proving to be a forward-looking monarchy, carefully adjusting its strategy to evolving market conditions.
Not only Saudi Arabia is not giving up its leading role in the oil market but is also trying to become a key player in other energy sectors.
Many obstacles are on this path, we’ll see if they will be overcome and if the oil giant will also become a solar giant.

 

 

[1] http://www.climateactionprogramme.org/news/saudi-arabia-plans-vigorous-renewable-energy-expansion-in-2018

[2] http://www.opec.org/opec_web/en/about_us/169.htm

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