Truman National Security Project

Why Are the World’s Largest Oil Producers Leading the Transition to Clean Energy? What the U.S. Can Learn from the Middle East

oil drum

Barack Obama’s second inaugural address was a big victory for the American clean tech industry. Not only did he mention “climate change” by name, he dedicated significant airtime to the subject. He stated that “the path towards sustainable energy sources will be long and sometimes difficult, but America cannot resist this transition; we must lead it. We cannot cede to other nations the technology that will power new jobs and new industries; we must claim its promise.”

The decarbonization of America’s energy system requires significant near-term investment that will likely only benefit future generations. However, some nations are investing in renewables to ensure a secure energy supply. Initially, European nations like Germany and Denmark lead the way in renewable energy investment.

Paradoxically, nations like Saudi Arabia and the United Arab Emirates are now preparing to invest or already investing heavily in renewables for energy security and human capital development.

Why would some of the world’s most resource-rich nations invest in renewables as a means of securing supply? The UAE has seen power blackouts and Saudi Arabia has had to postpone plans to build out its petrochemicals industry due to natural gas shortages. In fact, oil industry analysts ranging from investment banks to think tanks estimate that Saudi Arabia could become a net oil importer by 2030 without significant energy sector reform.

The UAE has been forced to import significant natural gas from Qatar. Saudi Arabia is the largest energy consumer in the Middle East and North Africa and is one of the few industrialized nations that burns liquid fuels for electricity. Saudi Aramco, the national petrol company of Saudi Arabia, sells oil domestically for less than five dollars per barrel. The government therefore incurs significant opportunity cost when oil is burned domestically rather than sold on a global market for over $100 per barrel.

In Saudi Arabia and the UAE, domestic gas resources have proven difficult to tap given that the majority is either “associated” or “sour.” Associated gas can only be extracted along with oil, and these nations are bound by OPEC to certain production quotas. Sour gas is expensive to process given its high sulfur content. The region’s shale gas reserves require significant amounts of water to extract. Given that Sheikh Mohammed bin Zayed Al Nahyan, the Crown Prince of Abu Dhabi, declared that “water is more important than oil,” it is unlikely that these resources will be extensively developed in the near term.

In light of these factors, Saudi Arabia and Abu Dhabi have announced aggressive plans to develop their renewable and nuclear energy resources. On a recent trip to the World Future Energy Summit in Abu Dhabi, I got an inside look into just how seriously these nations are taking their proposed investments.

Saudi Arabia plans to invest nearly $110 billion in less than two decades to meet 30 percent of its peak electricity demand with nuclear, solar, and wind power. The Abu Dhabi government, through its clean energy company Masdar, has already invested tens of billions in the world’s largest offshore wind farm, the world’s largest single unit concentrating solar power plant, and several other renewables plants and energy efficient developments. Both nations have heavily funded energy-focused universities and innovation clusters.

According to Exxon Mobil’s recently released Outlook for Energy: A View to 2040, the U.S. could become a net energy exporter by 2025. This view has been corroborated by other organizations, including the IEA. The U.S.’s oil consumption is projected to fall, mainly due to higher fuel efficiency standards for vehicles. The U.S. could speed its transition to a natural gas exporter by investing in renewable energy-generating capacity and energy efficiency projects.

Even if the U.S. is capable of becoming energy independent without significant clean energy investment, it will still be subject to resource price volatility. Given the Middle East’s instability, the U.S. would be wise not to rely too heavily on natural gas that is currently cheap.

The U.S.’s gas exporting capabilities are currently limited, but this is likely to change given high gas prices in other regions of the world. As the overcapacity in the U.S. gas industry eases and as global gas markets become more integrated, prices will certainly rise. The rise of shale gas in the U.S. exemplifies how quickly things can change in the energy industry.

In order to enable this transition, the U.S. must establish a long term energy strategy. A recent Pew Charitable Trusts report titled Innovate, Manufacture, Compete: A Clean Energy Action Plan highlighted the need for a comprehensive energy strategy in order for the U.S. to capitalize on the nearly two trillion dollars that will be invested in clean energy globally by 2018. Stop-and-start energy policy contributed to clean energy investment falling by over 10% in 2012.

Without a long term strategy and consistent capital, intensive clean energy investments become too risky. As Saudi Arabia and the UAE demonstrate, even the most resource-rich nations are subject to shortages and energy supply risks. Now is the time for the U.S. to establish a long term energy strategy and renew its investments in clean energy. Doing so will help secure an economically efficient energy supply for the decades to come.

Scott Burger is a Solar Analyst at Greentech Media, a leading renewable energy and cleantech news and research company. He is on Twitter @BurgerSB. Views expressed are his own.