The race to diversify oil-based economies is moving at a fast pace, not only to wean such economies from oil based revenue addiction but also a realisation that environmental pressure and technological advances in renewable energy are posing long term threats to fossil fuel producers.
Nuclear fusion is on the brink of a major milestone, and the advent of electric and hybrid cars and technological advances to reduce cost of production in solar energy are now realities. While safer nuclear fusion faces a chronic lack of funding, there’s a group of scientists quietly working on another method of generating electricity, in the lab that once created the atomic bomb in a process called nuclear fusion.
However, there have been 33 serious incidents and accidents at nuclear power stations since the first recorded one in 1952 at Chalk River in Ontario, Canada, raising public concern and sensitivity given the headline grabbing major incidents like Chernobyl (Russia), Fukushima (Japan), Three Mile Island (USA), Sellafield (UK) and Saint Laurent des Eaux (France).
This has not deterred nuclear power advocates from continuing to see this renewable energy source as a viable option. In the GCC, the UAE and Saudi Arabia have announced major nuclear power initiatives, in parallel with mega investments in solar energy, with Egypt also entering this field after signing with Russia to build North Africa’s largest nuclear power plant.
At the same time, some oil producers are diversifying from oil revenue dependency and the news that Norway’s $1 trillion sovereign wealth fund has announced an intention to sell off its oil and gas holdings caused some excitement and raised a few eyebrows about Norway’s intentions, given that Norway is a significant oil non-OPEC producer.
This financial divestment amounts to about 6 percent of the fund’s stockholdings, about $37 billion. Environmental activists were delighted and expect this to trigger a broader sell-off in fossil fuels.
The key question is whether oil is an appreciative or depreciative asset in the long termDr. Mohamed Ramady
Aligning with transition
The Norwegian decision comes on the heels of other global institutions like Rockefellers divesting from fossil fuels and prompted questions that investors will look more closely at alignment with the low carbon transition taking place globally, especially from the advent of electric vehicles (EV) and hybrid cars.
Electric vehicles sales surged, largely driven by strong demand in China. Sales of battery electric vehicles and plug-in hybrids exceeded 287,000 units in the three months ended in September, 63 percent higher than the same quarter a year ago and up 23 percent from the second quarter, according to a report released by Bloomberg New Energy Finance (BNEF).
China accounted for more than half of global sales as its market for electric cars doubled amid government efforts to curb pollution, which seems to worsen by the year and is now a serious health hazard. BNEF expects global EV sales to surpass 1 million units this year for the first time.
The market for electrified transport is starting to pick up speed as charging infrastructure becomes more accessible and manufacturers roll out models with longer driving ranges. In 2017, many established carmakers from Jaguar Land Rover to Volvo Cars announced plans to bring electric versions of their vehicles to market in the next few years.
Government intentions are also crucial indicators on where demand for fossil fuel is heading. Several governments have announced targets for cleaner transport, some driven by the emissions-cheating scandal that engulfed Volkswagen AG.
France and the UK said they will ban sales of new gasoline and diesel-burning cars by 2040, while the Netherlands is targeting that all new cars sold by 2030 will be emissions-free.
Hybrids and pollution
China - the world’s largest auto market -is mulling its own ban, and even California is considering following suit. India is another large market for EV and hybrids and faces rising pollution problems.
However, there are skeptics around who argue that while the switch to EV vehicles is to be welcomed, for this to succeed there has to be a renewable energy supporting infrastructure in place to recharge the EV batteries, as it defeats the whole purpose of a cleaner environment if in rural China and India newly empowered EV owners will still have to use diesel oil generators to charge EV car batteries.
OPINION: Vienna and the oil world conflicts
Only time will tell, but a combination of emission taxes, public pressure on governments to act and financial incentives to industry and automobile manufacturers to come up with emission controls and energy efficiency measures are very strong push factors to reduce fossil fuel demand in the future.
This raises different policy options for major oil producers on whether it is wise to keep oil in the ground for future sales or to maximize production and sales now. The key question is whether oil is an appreciative or depreciative asset in the long term.
Until they truly diversify their economies away from oil revenue dependency, the Gulf oil producers can only try to assess current and future forecasted oil prices based on global supply and demand, but this time they also have to factor in demand for renewable energy and technological development for EV and hybrid vehicles.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.