Saudi Government Invests in Solar Energy to Maintain Oil Revenue
Since 1938, just six years after the country’s formation, Saudi Arabia has had what Prince Mohammed bin Salman has called a “dangerous addiction to oil.” The ruling family has relied on oil as their “ruling bargain,” through which the government subsidizes fuel and electricity, making the price of gas as low as 50 cents a gallon, and the price of electricity as low as 1 cent a kilowatt-hour — a mere fraction of the lowest prices in the United States.
Under Prince Salman, Saudi Arabia is turning to renewable energy in an attempt to diversify the economy and increase growth. On Monday, the Saudi energy company ACWA Power agreed to build a solar farm capable of generating electricity for up to 200,000 homes. By 2023, the country hopes that 10 percent of its power will be generated by renewable energy.
But this doesn’t mean that the Saudis will be any less dependent on oil. While many countries such as Germany, Sweden, and Costa Rica are touting renewable energy as a way to mitigate the impacts of climate change, Saudi Arabia is turning towards renewables to allow it to increase the amount of oil they’re exporting.
The Saudis’ oil consumption has been rising at 7 percent per year, a trend that could deplete domestic oil reserves and result in the country being a net oil importer by 2038. Saudi Arabia’s intense sunlight makes a turn to solar energy a clear choice in their attempt to decrease domestic reliance upon oil.
Even if Saudi Arabia wasn’t on the verge of consuming all of their own oil, the International Monetary Fund recommended, in a 2017 report, to Gulf countries that they must diversify quickly. The IMF predicted the worst growth rate for the region in several years, and many economies in the Gulf have been struggling since oil prices fell in 2014.
Qatar has been trying to invest in more livestock to reduce its reliance on food imports, while Saudi Arabia has its Saudi Vision 2030, which includes its plan to shift to renewable energy. Vision 2030 would also create new private businesses, improve education, cut subsidies and introduce a 5 percent value-added tax. Although Saudi citizens are unlikely to welcome the subsidy cut, this reform, and the others in the Prince’s plan, seem vital now in light of the 50 percent population increase since 2000 and the large youth unemployment rate.
Although Saudis want to maintain oil revenue, which accounted for 72.5 percent of government revenue in 2015, the turn to renewables is also a response to “a young population that is looking for a better lifestyle, a better footprint in the world,” according to Saudi finance minister Mohammed al-Jadaan.
The Saudi government has been reaching out to the Trump administration, as well as other countries in search of possible investors. In light of the greater transparency that would be required to make Saudi Aramco, Saudi’s largest oil company, public and open it to potential investors, there have already been slight changes to the company, such as decreasing the tax rate.
Jean-Francois Seznec, a Georgetown University professor with banking and finance experience in the Middle East, believes that transparency is “vital to any kind of efforts to modernize the economy,” and it must be “imposed at all levels — especially for the biggest company in the kingdom.”
While Saudi Arabia’s primary motive for investing in clean energy and diversifying their economy is to maintain oil revenue, it may also push the country towards greater political transparency, and will prepare them for a future that requires less oil and that expects countries to be more environmentally conscious.