Why the World’s Oil Rich are Investing in Renewable Energy

When most people think of the Middle East, especially the countries of the Persian Gulf, they tend to think of oil and gas.  However, earlier this month the Prime Minister of Spain traveled to the United Arab Emirates and visited Masdar City, the world’s first attempt at a carbon neutral city, commending UAE leadership in promoting renewable energy technologies.  Saudi Arabia last year announced the creation of a similar venture, The King Abdullah City for Nuclear and Renewable Energy, to host university research laboratories and private-sector enterprises involved in low-carbon energy.  Saudi officials announced at a conference in Germany that Saudi Arabia intends to eventually export as much solar energy as it does petrol today with some industry analysts predicting Saudi investment of $120 billion over the next 25 years for development of its renewable energy industry.  Why is it that so much innovation in renewable energy is coming out of the most hydrocarbon rich area of the world?

There are a number of explanations for the Gulf countries focus on alternative energy.  First, they have access to large amounts of capital that they have to find investment opportunities for.  Alternative energy is a hot area and it seems only natural that countries housing some of the world’s largest sovereign wealth funds would seek to invest in an area that they have a lot of experience thinking about and that the rest of the world is pouring into.  Large amounts of politically directed capital also allow for investments that make little sense from a strictly business perspective.  Masdar is unlikely to return its initial capital, let alone make a profit.  Gulf countries view these as strategic investments for the day when the oil and gas runs out.

Second, these countries are experiencing rapid population growth and concurrent rapid growth in demand for electricity.  OPEC quotas are for the amount of oil extracted from the ground, not for the amount exported, so the more energy that can be provided from non-hydrocarbon sources the more oil can be sold for export.  According to U.S. data, Saudi Arabia consumed about 2.4 million barrels per day (bpd) of oil in 2008, up 50 per cent since the start of the decade.

A friend of mine working as a consultant on energy projects in the Gulf also noted another important reason for interest in alternative energy in the region, prestige.  According to a World Wildlife Fund report, the UAE and Kuwait rank first and third respectively in terms of global resources used per person (with the two countries separated by the U.S. ranked as having the second most resource intensive lifestyle).  My friend noted that Emiratis are very image conscious and don’t like to be last at anything.  Being publicly viewed as promoting sustainable energy is a way to remove some the stigma of being called out as having the least sustainable lifestyle on the planet.  Similarly, all the countries of the Gulf Cooperation Council would prefer to be seen as on the vanguard of promoting sustainability rather than the rear guard of environmental destruction.

Finally, there are some political dynamics surrounding investments into nuclear energy on the Arabian Peninsula worth noting.  In the last five years, 13 states in the Middle East have expressed interest in nuclear power.  Saudi Arabia and France signed a nuclear agreement in July 2010 and the UAE and U.S. signed a nuclear agreement in December 2009 that was somewhat controversial.  Some view the interest in nuclear technology by Arab states as a hedge against Iranian nuclear capabilities.  On the one hand, countries may be able to eventually create a nuclear breakout capability that would avoid triggering nuclear sanctions while at the same time the technical knowhow might be transitioned to nuclear weapons in case of an emergency.  A more positive spin would be that these countries are demonstrating to Iran how to generate nuclear power capabilities without running afoul of international norms.  It will be interesting to see whether recent events in Japan alter Middle Eastern countries atomic energy plans.

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