The Saudi Statement That Shocked the Energy World… and Why It’s Not Entirely True

Ali Al-Naimi, Saudi Arabia’s Minister of Petroleum and Minerals, just shocked the energy industry.

No stranger to being at the center of a tempest, Al-Naimi has seen his fair share of controversy.

After all, his strong-arm move to get OPEC to hold the line on production last Thanksgiving laid down the gauntlet to American shale producers, ushering in a collapse in crude prices. And then the manipulation of export prices to Asia – the main object of which was the removal of Russian competition in the Asian market – and the decision to increase Saudi production both had one overarching objective:

Maintaining market share in the face of rising non-OPEC production.

But speaking last week at the Business and Climate Conference in Paris, Al-Naimi made what is probably his most shocking proclamation to date.

Here’s my take on Al-Naimi’s surprise announcement… and how it could signal profits for us…

Will Saudi Arabia Give up Fossil Fuels?

At the conference, Al-Naimi stunned the audience by proclaiming that fossil fuels would be unnecessary in Saudi Arabia before the middle of this century. Instead, he argued that the country would be moving into solar and wind power.

He even commented somewhat tongue-in-cheek that the world would be importing Saudi electricity rather than oil.

Al-Naimi provided no details. However, it is already known that the kingdom has embarked on the largest solar project ever conceived, for which more than $16 billion has already been earmarked. Contracts have also been provided for solar facilities to power desalination plants and wind power to be added to the national power grid before the end of the decade.

And other Gulf OPEC members, especially the United Arab Emirates (UAE) and Kuwait, have their own massive solar projects underway.

Last December, I even visited the solar farm outside Dubai that is intended to power a portion of the city.

The amount of annual sunshine experienced in this part of the world certainly provides support for solar power. But the reliance on petroleum will be difficult to break, despite comments from a minister.

Saudi Arabia Will Turn to Renewables… to Free Up More Oil

For one thing, analysts question the ability of Saudi Arabia to move away from its revenue mainstay. Exports of crude oil provide the brunt of budgets. And then there is the push to expand petrochemical plants to allow the export of value-added oil products, especially to a thirsty Asia.

Also, there are no plans anywhere to replace traditional internal combustion engines with those able to run on electricity.

Experts both within the region and from the outside doubt that the Saudis will be able to combine their domestic economy’s weaning itself from oil with the takeover of energy exports by electricity.

Thus far, everybody I know has recognized the increasing interest in renewable energies inside Saudi Arabia. Many do see Riyadh ramping up alternative sources domestically. There is even the acceptance that environmental concerns coming from Saudi officials as a justification to pursue solar and wind are genuine.       

But the prevailing view sees a domestic switch in energy sources to allow additional crude production for export, either as raw material or as finished oil products. In short, there is the belief that Saudi Arabia will increasingly rely on solar and wind locally… but to free up more oil for export, not to move away from it.

OPEC Has Understood Energy Shifts for Deacades

Admittedly, Al-Naimi’s statement that the world by midcentury would rely on Saudi electricity exports rather than oil took everybody by surprise.

The widespread interpretation considers the minister’s statement evocative and not a serious telegraphing of a genuine change in policy focus. After all, the comment was supported by no analysis or substantive comment. 

On the other hand, OPEC in general and the Saudis in particular are quite aware of the major changes underway in both the sourcing and usage of energy worldwide. 

An OPEC internal planning document released a decade ago, before the advent of U.S. shale and tight oil, adopted the approach that no member of the cartel would be selling a drop of oil to the U.S. by 2050 (or even before).

The rationale at the time had already assumed all of North America would be relying on a combination of heavy oil from the Western Canadian Sedimentary Basin and alternatives like solar and wind.

And that was even before such alternatives had taken a significant percentage of the market, had a developed infrastructure beyond given localities, and had approached anything close to grid parity (the matching of generating costs from natural gas-fueled power plants or even those using coal).

In short, OPEC planning documents expected that the rise in crude oil prices to well beyond $120 a barrel on a consistent basis would oblige the U.S. to seek alternative energy approaches. That became an even greater assumption once crude spiked above $140 in the summer of 2008.

Profit Opportunities Are on the Way

The current suggestion by the manager of Saudi’s oil policy may just be an attempt to spice up an otherwise dull international meeting. Nonetheless, it does provide another wrinkle in the changing global energy competition.

One thing is certain: Whether or not the Saudis somehow move away from oil, renewable energy is making major gains in the Persian Gulf and elsewhere.

That is opening up new profitmaking opportunities for energy investors.   

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