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Energy and Geopolitics in the Middle East and the Price Game

There is undoubtedly a global re-alignment of economic power and energy strategies both with respect to fossil and renewable based energy sources taking place. Earlier this year has seen the decline in global oil prices and as simultaneous increase in production from shale oil, specifically from the USA. At the same time we are witnessing a process of disruptive change resulting from innovative processes and disruptive technologies. One example is the rapid decline in the cost of production from solar and wind. A social change is also underway from the perspective of populations becoming increasingly concentrate and urbanized and adopting decentralized technologies such as smart phones to do ever more tasks including remote control of energy systems in the home.

Countries such as the Kingdom of Saudi Arabia are at the forefront of being exposed to these global changes. Recent reports in The Economist claim that the USA has overtaken the Kingdom as the world’s largest oil producer. Also, more and more reports are being released which demonstrate that power generation from solar panels is achieving grid parity with other fossil based technologies. In this article we try to understand the policy options for Gulf countries such as the Kingdom of Saudi Arabia and how it may respond to such global changes.

In the years 2013 and 2014 the Kingdom of Saudi Arabia through its agency the King Abdullah City of Atomic and Renewable Energy (KA-CARE) declared through white papers its intent to build over 50GW of renewable capacity by around 2020, and this would have a huge transformational impact on the Kingdom’s economy in terms of both production, employment and research and development. However, the expansion of oil shale production, the fall in global oil prices and renewable policy which has in the most gentlest way been put on the backburner has left outsiders wondering what the Kingdom’s future energy strategy is.

In this article we provide an opinion on the direction that a country like the Kingdom of Saudi Arabia may take; this is in part due to our involvement in multiple areas in the Kingdom at the moment. An important step the Kingdom is taking is to rationalize its energy end use consumption. It is a logical step to understand consumption patterns of key loads in order to better predict and plan the energy system for the future. By understanding patterns and energy intensity, the Kingdom can craft effective planning, operational optimization and demand side management strategies that result in delaying the number of GW that has to be installed to meet rising demand. As part of an overall demand side strategy, the Kingdom will look to adopt smart metering and smart grid technology which will enhance information flows and impact on consumer and producer behavior. Therefore,  energy rationalization and efficiency/optimization strategies are the first steps the Kingdom is taking.

Although the drive to expand renewable energy has been formally put back to beyond 2030, there are still policy and strategies being formulated to re-cast a new approach to renewables. Saudi Aramco and Saudi Electricity Company are already taking some joint initiatives to better understand both the wind and solar resource in the Kingdom. Whilst the recent bids by ACWA power into Dubai for establishing a solar PV facility has resulted in a shockingly low price (less than USc 6 per kWh) competing with grid based power coming from sources such as natural gas. Therefore PV has become itself a disruptive technology due to the rate at which the cost of production is declining.

Therefore it is in the Kingdom’s interest to rely on market forces to stabilize the oil price such that there is limited further expansion in the production of high cost oil reserves. At the same time, the Kingdom should be doing its best to conserve the amount of hydrocarbons being consumed domestically by implementing energy efficiency initiatives. Finally it is clear that solar PV and wind combined with smart grids are proving themselves to be a disruptive and transformative technology. The Kingdom should therefore better understand the resource availability and take advantage of falling prices to transform its power sector and free-up hydrocarbons for other purposes than simply domestic consumption.

In short, we have a ‘price game’ which is being played out. At a certain price it makes sense to rationalize end use consumption and at a certain price it makes sense to also role out more generation capacity based on renewables. This has to fit into the decentralized technologies and urbanization taking place changing the process of production, consumption and diversification. Nevertheless, what is indeed lacking in the Kingdom is a new energy policy and strategy which addresses all these issues at a national level. The Kingdom has to re-cast a vision of what its energy system will look like in the future based on its best projection of underlying prices and economics. Given the recent fluctuations in the oil price and decline in the cost of various technologies, the cost benefit estimate is far from static. In this new dynamic, disruptive and transformative environment the Kingdom will nevertheless need to show courage and commit itself to some form of a vision for change.


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