Will the oil wealth last?

Here’s a question. In 50 years, where will the oil wealth have gone?

If, as most evidence suggests, the world is transitioning away from fossil fuels and towards renewables, what will happen to the oil states?

Even if you hold the same views as The Times commenters I highlighted on Wednesday, I would imagine that you still believe that at a certain point renewable energy will overtake fossil fuels.

I mean, on a long enough timeline, it has to. Fossil fuel will run out long before the sun explodes – likely billions of years before.

But in reality, the world won’t wait for fossil fuels to run out before renewables take over.

Even in the US, renewables are already taking over from fossil fuels.

From Green Matters:

Renewable energy has been on the rise in the U.S. for years — but this month, it’s reaching new heights. As the Institute for Energy Economics & Financial Analysis (IEEFA) reported, the month of April 2019 is slated to be the first in U.S. history where renewable energy generates more electricity than coal-powered plants.

And the US isn’t the only one. This quiet switchover is happening all around the world, including some surprising places.

In May 2017, India cancelled its plans to build 14 gigawatts of coal-fired power stations and instead opted for solar.

Why? Well, solar power is now cheaper than coal power in India.

“For the first time solar is cheaper than coal in India and the implications this has for transforming global energy markets is profound.”

– Tim Buckley, director of Energy Finance Studies, Australasia

And China, the world’s biggest energy market, cancelled 100 coal power projects in 2017 in favour of renewable alternatives.

China is now the world’s biggest clean energy investor. It will spend 2.5tn yuan (£292bn) on renewable energy projects by 2021.

And that brings us to Saudi Arabia, the quintessential oil nation.

By 2023 Saudi Arabia aims to develop almost 10 GW of renewable energy. This will replace the equivalent of 80,000 barrels of oil a day. And it’s investing between $30bn and $50bn into the initiative.

The oil nations’ secret weapon

And that’s the key thing here. Yes, the oil nations built their huge wealth by pulling oil out of the ground. But they also have a big advantage when it comes to solar.

Many of the oil nations literally sprang out of the desert. And the desert gets a whole lot of sunlight.

Plus these nations were built on trading energy. They are experts at it.

From The Conversation:

The economies of the United Arab Emirates, Saudi Arabia, Qatar and the other Gulf nations are built around energy exports. And as climate change imposes pressure on the extraction of fossil fuels, these countries will have to look for alternative energy (and income) sources in order to keep their economies afloat. The International Renewable Energy Agency set up its headquarters in Abu Dhabi, and the region has no shortage of ambitious solar projects promising extremely cheap electricity. However only a small amount of capacity has actually been deployed so far. 

So to come back to my original question, will the wealth stay with the wealthy? Will the oil nations also become titans of renewable energy?

It’s a narrative that makes sense, until you remember that renewable energy sources are a lot less scarce than oil.

If your country doesn’t hold oil, you have to import it. You have no choice. You need that oil.

But from a renewable energy perspective, if you don’t have one source, you usually have another.

The UK, for example is not known for its sunlight. But – and if you’ve spent much time in the north, you’ll know this – it is windy.

Renewable energy currently accounts for nearly a third of power in the UK, and half of this is generated from wind energy, according to renewable UK.

So, as the world transitions to renewables, it will likely at the same time transition towards more local power generation.

Countries won’t need to import their power from the oil nations because they will be able to generate all they need themselves.

Which again leads me to the question, what will happen to the oil nations’ wealth?

Until next time,

Harry Hamburg
Editor, Exponential Investor

Category: Commodities

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