What will be the impact of rising oil prices on the energy transition?

Amid rising global demand and concerns over key supplies, global oil prices are approaching $100 a barrel for the first time since 2014. But, with prices rising, what does this mean for the renewable energy transition, especially in the Gulf countries?

After opening the year at around $78 a barrel, Brent prices rose sharply in the first six weeks of 2022 to top $94 by February 14, the highest price in more than seven years.

Driven mainly by a lack of supply and a recent spike in post-lockdown global demand, the rise caps a dramatic recovery in prices, which had fallen below $20 a barrel in April 2020.

Given the low oil prices in recent years, the recent increase has sparked discussions about the implications for renewable energy investments, especially for oil-exporting Gulf countries.

Although investment in oil and gas has fallen by around 30% since the outbreak of the pandemic, there are signs that rising demand and rising prices could lead to a reversal of this trend.

Carbon Tracker, a London-based think tank focused on climate change, noted last month that rising oil prices could encourage energy companies to invest in new exploration and production projects.

Indeed, on February 1, energy giant ExxonMobil announced a 45% increase in its budget for drilling and other activities this year, while a day later members of the United oil-exporting nations and other major oil-producing nations – an alliance known as OPEC+ – have agreed to stick to their pre-planned target of increasing oil production by 400,000 barrels per day .

At the same time, there are fears that rising oil prices could boost coal consumption, which hit a record high in 2021 and is on track to reach even higher levels this year, according to the International Energy Agency. energy.

In addition to its lower price, the use of coal is being driven by growing demand for energy – led by China and India – and insufficient levels of investment in renewable energy.

A boon for renewables?

Although high oil prices have the potential to spur new investment in oil and gas projects, renewables could ultimately benefit from the current situation.

Rather than directly challenging renewables and slowing the energy transition, many energy sector analysts believe that current high prices – and the associated financial windfall – could lead governments and oil majors to play the long game. and to further increase their investments in renewable energy.

For example, in September last year, French energy giant Total said it would take advantage of high oil prices to buy back $1.5 billion worth of shares to boost investment in renewable energy, while earlier this month BP – after announcing its highest annual profit in eight years, at $12.8 billion – said it would increase spending on low-carbon energy 40% of total expenditure by 2025 and 50% by 2030.

The Gulf advances with renewable energies

The Gulf is an excellent example of an oil-producing region that has recently reaffirmed its commitment to renewable energy.

Indeed, many countries in the Middle East have identified renewable energy development as key to their long-term economic diversification plans.

For example, Saudi Arabia aims to generate 50% of its electricity from renewables by 2030 and set a net zero goal of 2060.

To help achieve these goals, the government announced in December that it would invest SR380 billion ($101.3 billion) in renewable energy generation by the end of the decade, while in April last year, it inaugurated the Sakaka solar power plant, the country’s first power plant. renewable energy project.

Meanwhile, in October, the United Arab Emirates pledged to invest 600 billion dirhams ($163.4 billion) in renewable energy by 2050, when it hopes to reach net zero emissions.

The announcement came just weeks after the inauguration of the first stage of the Mohammed bin Rashid Al Maktoum Solar Park in Dubai. The park should have a capacity of 5 GW by 2030.

Elsewhere in the region, Oman inaugurated the 500 MW Ibri 2 solar field in late January, the country’s largest large-scale renewable energy project, while Qatar, one of the world’s largest exporters of natural gas, also placed greater emphasis on renewable energy.

In October last year, Qatar Petroleum, the national energy company, changed its name to Qatar Energy, to better reflect the company’s renewable energy strategy.

Major projects include the 800 MW Al Kharsaah solar power plant, located about 80 km west of the capital Doha.

When fully completed, the project will be the largest renewable energy development in the country. Its inauguration is scheduled for the first half of this year.

While there is some skepticism about exactly how much of the financial windfall associated with high oil prices will go to the energy transition, and whether net zero ambitions can be achieved if funds continue to flow to new exploration and production projects, it is clear that renewables are playing an increasingly important role in the long-term energy plans of companies and governments.

By Oxford Business Group

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Felix J. Dixon