In light of recent turmoil between the U.S. and Saudi Deputy Crown Prince Mohammed bin Salman (MbS), it may be hard to believe that Saudi Arabia is one of the world’s biggest believers in a sunny future for solar power.
Last year, its now-former oil minister Ali al-Naimi announced that the Saudi kingdom plans to become a “global power in solar,” which is “more economic than fossil fuels.”
This is an incredibly progressive sentiment for a country with so much stake in the energy market. Not to mention, it’s a game changer, worldwide.
Saudi Arabia’s long-term goal is to become as much an exporter of solar power – generated by the sun – as it is an oil exporter, today.
The path to this goal, however, will not be without obstacles.
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Vision 2030
A part of the problem is simple physics: the country’s solar power plants would need to stand up to both extreme heat and the raging sandstorms that plague the region.
To that end, the Saudis have joined in on venture capital funding for California-based Solexel Inc., which makes wafer-thin photovoltaic panels that are cheaper and lighter. And most importantly, the panels can withstand heat and they work well in dusty conditions.
But the bigger problem may be Saudi Arabia’s lumbering bureaucracy.
Back in 2012, the Saudi government announced an ambitious program to install 41 gigawatts of solar capacity by the year 2032. However, little headway has been made to actually achieve this lofty goal since then.
Now, Deputy Crown Prince bin Salman has announced a new program called Vision 2030.
While it boasts a more attainable goal of 9.5 gigawatts of solar capacity, this is equivalent to 14% of the country’s current generating capacity and would require an immediate jump into action in order to reach this target in the next 14 years.
It can be expected that MbS – who has already proven to be a leader not to be messed with – will get state-owned companies like Saudi Aramco and Saudi Electric Company to quit squabbling over control and get the ball rolling.
The Saudis will have the wind at their back, so to speak. The price of solar power on projects in the region has plunged by 50% in just the past year alone thanks to lower prices on photovoltaics.
But with Saudi Arabia’s dramatic move toward solar, what will be the implications for the oil market?
A Change in Oil Futures
MbS fully believes that oil will be replaced by solar and other renewable energy sources by the middle of the century, and he is dedicated to ensuring that Saudi Arabia is ahead of the curve on this evolution.
However, if the country is going to successfully transition into a solar mecca, they will need a foolproof strategy regarding oil production.
Perhaps Prince Mohammed bin Salman has read Daniel Lacalle and Diego Parilla’s book The Energy World Is Flat, which states that “without demand, crude oil is worthless – regardless of the marginal cost.” Ultimately, the authors espouse the idea that “the last barrel of oil won’t be worth millions, it will be worth zero.”
This summarizes the general understanding of the current Saudi regime. And this, it would seem, is why MbS is speaking of raising production to 20 million barrels per day.
Their reasoning appears to be: Get rid of all this oil while it is still in demand. In a few decades it will no longer be needed, anyway. What good will it be once it’s obsolete and completely replaced by solar power?
The rampaging oil bulls, on the other hand, think that the Crown Prince is bluffing. But, he has certainly set a precedent of seriousness.
It seem that the Saudis are merely waiting for cover. Soon after the U.S. shale producers restart some of their fracklogged wells, the Saudis will raise output and blame those producers for starting a drilling war.
Saudi Arabian production levels will only rise a million barrels or so, initially, but will then continue to increase in the years ahead.
Saudi Bonds
Many pundits will say that MbS simply cannot afford to do this – the Saudis will run out of money.
But Saudi Arabia has plenty of “dry powder.” In fact, they have over $700 billion worth of foreign exchange reserves.
Plus, they have the world’s central bankers inadvertently helping them. With zero and negative rates abound, everyone, everywhere is looking for yield.
If Saudi Arabia manages to simultaneously increase oil production and kick-start a major solar campaign, it sets itself up to make a big splash in the marketplace – jumping in and offering surefire yield for international investors.
It will launch its debut international bonds ($15 billion worth) possibly as soon as July, with the 10-year portion of the offering with a potential yield of 4%.
At that comparatively juicy prospective profit, global investors will gobble it up. This will allow MbS and Saudi Arabia to sell a lot more bonds in the future, closing any funding gap caused by low oil prices.
Bottom line – the Saudis have seen the future. And it’s in solar power, not oil.
Good investing,
Tim Maverick
The post Saudi Arabia’s Solar Planning is Paved in Oil Production appeared first on Wall Street Daily.
