Background
Oil has been in the headline for hundred years and has powered the economy by maintaining the industrial revolution power resources worldwide. The first growth spurt of oil started when there was a discovery of The Spindletop geyser in 1901, and within a year, more than 1,500 oil companies arose and oil became the dominant source of energy until today.[1] The location of oil itself is hidden in the sub-surfaces, which must have the basic element of petroleum systems such as source rock, porous and permeable reservoir rock, and the tight cap rock. Since oil can only be found in a particular geological condition, countries are divided based on the oil content of their areas; they are oil producer countries and oil consumer countries.
Long before oil became the primary source of energy, people used energy as what is called now renewable energy. For example, biomass has been used since 790,000[2] years ago, and wind energy was also used to navigate ships from 7,000 years ago. Although renewable energy has been recognized since a long time ago, the development of renewable energy itself did not pick the interests of investors at that time due to the discoveries of fossil fuels in the mid of 18th centuries. Over the past decade, renewable energy has grown at a different speed around the world because of various factors, such as costs, technologies, markets, and regulations. But today the volatility of oil price renders oil consumer countries to find other alternatives to meet their energy demand and to reduce their dependency on imported fuels. Furthermore, the outcry from environmental activists on the rise of global temperature and CO2 content in the atmosphere has also driven people to shift from conventional fuels to more environmentally friendly fuels.
One of the most visible barriers to renewable energy growth is the cost, especially due to the high upfront investment needs for installing renewable energy with most of the expenses come from building the technology. Moreover, the strong market of fossil fuel makes renewable energy has to compete with major pioneer market players such as oil and gas industries which is an unequal playing field. Nevertheless, the demand and consumption of renewable energy have increased around the world (Figure 1). The growth of combined renewables in the energy mix (including traditional biomass and modern renewables) slightly overcame the growth of energy demand ( about 0.8% higher). On the other hand, the modern renewables energy itself (solar PV, wind power, hydropower, bio-power, geothermal and ocean energy) contributed an increase of 4.7%. Nevertheless, the growth of fossil fuel was only 1.8% from 2004 until 2014 which showed an indication that fossil fuels may not hold their market very well.
Figure 1. The Global Renewable Energy Growth compared to Total Final Energy Consumption (TFEC), 2004 – 2014 (Source: Renewables 2017 Global Status Report, REN21, 2017)
The rapid growth of renewable energy gives an impact to the oil producer countries as these countries earn a significant amount of national income from oil and gas business only. There was a sharp decline of the GDP percentage of oil rent[3] from 2011 until 2015 in top oil-producing countries: Saudi Arabia; UEA; Russia; Venezuela; China; Brazil; and Mexico (see Figure 2). This might be caused by some factors. First, the sudden increase in production of shale oil in the United States led to oil price to decrease by more than 50%. Second, the Paris Agreement[4] engages countries in dealing with the impacts of climate change by assigning carbon market. Third, the cost of renewable power generation has continued to fall, especially for solar and wind power (see Figure 3).
Figure 2. Oil rents (% GDP) from several top oil producer countries (Source: World Bank, 2017)
Figure 3. Levelized Cost of Electricity (LCOE) of Renewable Energy in 2010 compared to 2016 (Source: International Renewable Energy Agency (IRENA), 2017)
Based on the information above, how will oil producer countries deal with the rise of renewable energy worldwide? Is it true that the rise of renewable energy is cutting their national income and generating a problem in the nation? To answer this question, we study the condition in four top oil producer countries; the Gulf countries, the United States, Russia and China. As shown in Figure 4, Saudi Arabia (as one of the Gulf countries) still leads the group with oil production of 11.75 million barrels per day, followed by the United States with their shale oil of 10.59 million barrels per day, Russia with 10.3 million barrels per day and China with 4.19 million barrels per day from 1970 until 2015[5].
Figure 4. Crude Oil Production in Top 10 Oil Producer Countries from 1970 – 2015 (Source: IEA, 2017)
The Gulf Countries
Four out of ten countries on the top oil producers list are the Gulf Countries. More than 98% of their primary energy consumption was fulfilled by oil and gas (see Figure 5). This suggests that the Gulf Countries is one of the most intensive users of fossil energy and also one of the highest carbon dioxide emitters in the world per capita. Nevertheless, the Gulf Countries hold a vast number of renewable energy potential, especially for solar and wind power.
Figure 5. Renewable Energy Consumption (% of Total Final Energy Consumption) on the Gulf Countries[6] (Source: World Bank, 2017)
The Gulf Countries is expected to increase their renewable energy share in the region or worldwide to 20.6% in 2035. In particular, the United Arab Emirates (U.A.E.) have the most ambitious strategy to become a net electricity exporter by setting renewable energy’s share at 44% and nuclear energy’s share at 6% in their Energy Plan 2050. [7] As a country in The Gulf Countries, Saudi Arabia tried to be the leader in the energy sector, including the renewable energy technology. They plan to build more than 9.5 GW of renewable energy in 2020 by investing US$50 billion through various programs. However, since most of the countries in The Gulf Countries have put their electricity as a public good which should be provided by the government, their electricity price is known as the lowest in the world. Thus, electricity subsidies will pose a problem since renewable energy has a higher cost and the price seems to be not competitive enough compared to fossil fuel’s price.
After the sudden drop in oil prices in 2015, many countries have started consideration to cut subsidies on both fuel and electricity. Started by U.A.E. shifting of gasoline and diesel prices to global prices, followed by Abu Dhabi raising the utility rates, Saudi Arabia cutting subsidies, Oman eliminating its subsidies, Bahrain raising diesel and kerosene prices, and Kuwait trimming more than a third from handouts. Although the cutting of subsidies triggered adverse reactions from consumers, many believe that subsidies in The Gulf Countries have already escalated to absurd levels which make their national income mostly used to run the electricity and maintain fuel subsidies, rather than to a growth-enhancing investment. With the grants being swept away from The Gulf Countries, it gives new hope for renewable energy to be more price competitive. In 2012, EIA (Energy Information Administration) studied that solar PV will become more available without the need of subsidies in the Gulf Countries with the assumption of oil prices at about US$ 80/barrel or natural gas prices above US$ 13/MMBtu.
The United States
The United States (U.S.) ranked 2nd as the most extensive energy consumer after China and ranked 7th as the highest energy consumption per-capita after Canada and some other countries with the small population. The primary energy consumed in the U.S. is divided into various energy sources including renewable energy. Although the development progress of biomass and geothermal energy have a relatively flat growth, the growth of solar and wind power have risen rapidly in the last couple of years. The presence of wind power are mainly located in Texas, Oklahoma, Kansas, Iowa, and Colorado, while solar power is dominating California, North Carolina, Nevada, Arizona, and Georgia[8]. Furthermore, the wind energy has doubled in number, and the number of solar energy has increased more than 20 times between 2010 and 2015. A comprehensive study by the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) even pointed out that the U.S. could generate most of its electricity from renewable energy by 2050.
The abundant oil shale production in the U.S., has been the primary topic in the oil market for several years and made the oil price dropped to more than 50% globally in 2015. Some people predicted that the shale oil discoveries could shift the renewable energy back to a lower level due to the price difference. Although some of the renewable energy’s prices are getting cheaper, it is still a lot higher than the shale gas. The situation is becoming even more intense for renewables investment after the U.S. pulled out from the Paris Climate Agreement and the new regulation on import duties stated that solar equipment made abroad will receive a 30% import tax. Studies from Ernst and Young, which regularly ranked the Renewable Energy Country Attractiveness Index every year, has shown that the ranking of the U.S had fallen to the third position behind China and India in 2017[9]. This is mainly due to President Donald Trump campaign which promises to boost the fossil fuel energy and renewed interest in coal production.
Figure 6. Energy Consumption in the United States (Source: IEA, 2017)
Russia
The implementation of renewable energy is not a new issue for the Soviet Union. History stated that in the 1930s, Russia was the first nation to build utility-scale wind turbines. In the 1960s, they opened an ocean tidal electric plant and even precede Iceland on the geothermal power plants building. However, during the post-Soviet period (1991 – 2014), Russia was on the economic upheaval which restrained the development of renewable energy. During this period, the Russian government had a significant ambition to increase economic growth without considering the impact on the environment by pushing their fossil fuel production such as coal, oil and natural gas. It made Russia very dependent on oil and gas industries and generated about 15% of GDP, 35% of federal budget revenue and 60% of exports from fossil fuel industries only.[10] Russia kept pushing oil and gas popularity performance by embarking on drilling projects in the country’s Arctic to ensure fossil fuel output is maintained and well subsidized.
Today, the Russian president, Vladimir Putin has been speaking about his plans for renewable energy. He stated that the renewable energy is the “main development path, the proper path for mankind.” Renewable energy is spreading through all the Soviet Union, especially in the remote area, where the electric power -consisted of diesel electro-generators- requires significant amounts of high-cost fuel. The high cost originated mostly from the transportation cost of the fossil fuel itself. The fuel supply was shipped regularly only during the short summer season, while during the long winter season the fuel supply became a constant worry. In the remote area where the last new construction of energy power occurred decades ago, the presence of renewable energy such as small wind farm was a sign of life returning to one of Russia’s most depressed economic regions. Furthermore, hydroelectric and nuclear power as clean energy has been the primary energy supplier in Russia since a long time ago and generated about 31% from Russia’s energy mix (see Figure 7).
Figure 7. Russia Energy Mix in 2015 (Source: Bloomberg New Energy Financial, 2017)
Russia has had a long history of being one of the leaders in the energy sector and now has the chance to extend their status into a leader in renewable energy. A contract to purchase 1.9 GW of clean energy has been made to create job opportunities for their citizen[11]. In 2017, the government enacted strict rules which allowed the construction of power plants only if they are installed by at least 40% of local equipments.[12] This regulation triggered most companies to create a joint-venture with leading European manufacturers to meet the government’s rules. While many think that the law is hampering the energy industry, the renewable energy still rises on small scales throughout the country, especially for solar and wind power.
China
China is one of the countries with the most rapid growth of renewable energy and contributes 40% of worldwide renewable energy growth. Data from IEA in 2017 revealed that China’s renewables accounted for 65% of additional electricity capacity around the world. Solar PV grew faster compared to the other renewable sources due to the cost reduction and policy support from China’s government. In 2017, solar PV capacity increased by 50% in comparison to 2015 and reached more than 74 GW, in which half of it is located in China7.
Figure 8. Renewable Energy Growth in China compared to Other Countries (Source: China Renewable Energy Outlook, 2017)
China’s impressive investment in renewable energy is due to its needs to tackle the country’s air pollution problems. China has a tremendous change from an economic backwater to an unrivaled industrial power which lifted hundreds million people out of poverty. However, their ambitious economic target has also brought substantial environmental issues around the country.
In 2015, air pollution killed more than 1.1 million people in China, which is the highest mortality rate according to the Health Effect Institute in the U.S.. This pollution is mainly coming from coal burning, which shares about 64% of the total primary energy consumption in China[13] (Figure 9). After years of ignoring the dangerous levels of air pollution crisis, the Chinese government started to put renewable energy as an essential program and invested more than the US$44 billion to the clean energy project in 2017[14].
China government also views renewable energy as a powerful engine for job creation. In 2009, the Chinese government identified solar manufacturing as a promising industry and attempted to accelerate the growth by providing low cost and subsidies to the solar cell manufacturers. Today, China companies accounted for around 60% of total annual global solar cell manufacturing capacity. Thus, China has a significant influence on solar PV supply and prices globally. For instance, it has successfully driven solar generation to be more cost-competitive with electricity from fossil fuels like natural gas and even coal.
Figure 9. Development of primary energy demand in China
from 1990 tp 2016 by fuel type, in absolute value (Mtce)
(Source: China Renewable Energy Outlook 2017)
Although China’s economy is still highly dependent on coal, the commitment to cut off the emission is impressive. In recent years, the government has shut down 40% of private factories for not obeying emission regulations, stopped approving new coal power plant and reduced coal’s share to 33% in 2030.[15] Whilst China faces challenges as it moves from fossil fuels to renewable, experts from IEA projects stated that China’s dependent on coal would keep declining and the investment in renewable energy project around the world will continue to grow and contribute to a considerable portion to China’s national income.
Conclusion
Renewable energy plays a significant role in the world’s current energy consumption and forced some major oil-producing countries to develop their strategy in facing the rise of renewable energy. Firstly, most top oil producer countries see renewable energy as an opportunity instead of a threat. In fact, China as the fourth largest oil producer country is also the leader in the renewable energy, in which generates 40% of the world’s renewable energy.
Secondly, the development of renewable energy itself has changed over time. At first, renewable energy is an idea to confront future energy crisis due to the instability of most of the oil producer countries. Today, we see renewable energy not only as an alternative but also as a replacement for fossil fuels. Most of the renewable energy has a more sustainable resource compared to fossil fuels.
Thirdly, the renewable energy is one of the solutions for environmental issues. For example, in China, environmental issues are driving renewable energy at the top of its priority. The optimal use of renewable energy will minimize China’s air pollution issues and produce minimum secondary waste.
Fourthly, some countries which have a significant amount of remote area but have insufficient access to fuel supply, such as Russia, sees the presence of renewable energy as a new hope for the remote area’s electrification and economic development.
Lastly, the share of renewable energy in global power generation will keep rising at a remarkable pace from 22% in 2013 to 26% in 2020 (IEA, 2015)[16]. The rapid growth of renewable energy has attracted countries to invest more in developing technologies, to compete to be the leader in renewable energy industries, and to create job opportunities for their citizen. Some countries even made risky regulations on instruments import, such as the United States and Russia. The United States gives 30% import tax on solar PV equipment, while Russia only allowed less than 60% of imported materials for its renewables power plants. Both regulations were made to trigger the local manufactures to create their own renewable energy equipment.
* This opinion piece is the author(s) own and does not necessarily represent opinions of the Purnomo Yusgiantoro Center (PYC).
[1] http://www.history.com/topics/oil-industry
[2] http://www.ifbusinesssolutions.com.au/blog-post/renewable-energy-looking-after-the-environment
[3] Oil rents are the difference between the value of crude oil production at world prices and total costs of production.
[4] Paris Agreement is an agreement to set out a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2°C.
[5] https://financesonline.com/top-10-oil-producing-countries-in-the-world-wheres-the-greatest-petroleum-dominion/
[6] The share of renewables energy in total final energy consumption.
[7] Middle East Power: Outlook 2035 – Siemens
[8] http://www.renewableenergyworld.com/articles/2016/08/renewable-energy-was-16-9-percent-of-u-s-electric-generation-in-the-first-half-of-2016.html
[9] http://www.ey.com/gl/en/industries/power—utilities/ey-renewable-energy-country-attractiveness-index-our-index
[10] https://www.ft.com/content/638e1dc6-1bb2-11e7-bcac-6d03d067f81f
[11] https://www.bloomberg.com/news/articles/2017-05-29/russia-starts-largest-renewable-energy-auction-in-bid-for-jobs
[12] http://www.climateactionprogramme.org/news/china-leads-the-way-to-the-global-renewable-energy-revolution
[13] Energy Research Institute of Academy of Macroeconomic Research (NDRC), China National Renewable Energy Center, “China Renewable Energy Outlook 2017”.
[14] https://futurism.com/china-new-world-leader-renewable-energy/
[15] http://www.sunwindenergy.com/content/china-renewable-energy-outlook-2017
[16] https://www.iea.org/newsroom/news/2015/october/renewables-to-lead-world-power-market-growth-to-2020.html
