Saudi Arabia’s retreat from oil places it on the right side of history

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For Saudi Arabia to break its “addiction” to oil sounds a bit like the Catholic Church trying to end its addiction to Christianity. It is not only the world’s largest oil exporter; it also sits on the world’s largest oil reserves. But this was indeed what the man overseeing the Saudi economy, Deputy Crown Prince Mohammed bin Salman, proposed in the Vision 2030 plan, launched last week.

The plan, in a nutshell, is to start selling off stakes in Aramco, the state-owned company that controls Saudi’s oil industry, and use the money both to build up the country’s sovereign wealth fund and to help it diversify the economy into other industries. At one level it is a story about the long-term direction of a country over-dependent on a single product, and as such it makes a lot of sense. Oil accounts for 90 per cent of government revenues, while the government accounts for 60 per cent of GDP. It would be much safer to build up other industries, and much healthier for the private sector to be larger relative to the public. Quite how you achieve this rebalancing is another matter, and there are many issues about the geopolitical role of the Saudi state more generally. But in economic terms the aim it is straightforward enough.

There is, however, the wider context of the world’s reliance on oil, or rather on hydrocarbons, for gas is as important as oil in the contribution it makes to primary energy supplies. Earlier this month the Rockefeller Family Fund announced that it would divest itself of shares in ExxonMobil, saying that “morally reprehensible” to invest in oil – a nice twist, since it was the predecessor of Exxon, Standard Oil, on which the Rockefeller fortune was made. It will invest instead in renewable energy sources.

Separately, the Government Pension Fund of Norway said it was selling its investments in a number of energy companies, especially those in coal. Coal isn’t oil, but a similar point could be made: an enterprise whose wealth is built on fossil fuels is seeking to move out of them.

Is this the start of a more general retreat from fossil fuels, driven not so much by government policies but by financial forces? Up to now the push to alternative sources of energy has been largely political. So we have the subsidies that have been given to the electricity industry in the UK and Europe to develop alternative sources of energy, and the payments to homeowners to put solar panels on their roofs. But there are limits to what politics can achieve, and there is already plenty of evidence of push-back. For example, the high energy charges to fund renewables are one of the reasons why steel-making has become so unprofitable in the UK, and despite huge subsidies, it looks as though the Sizewell C nuclear plant will never be built. But if economic forces could take over from political ones, then the transition to a low-carbon economy would be assured.

The issue really is one of timescale. Coal, for environmental and other reasons including transport costs, will contribute a smaller proportion of primary energy. But the share of oil and gas may not fall much, if at all. While the use of energy in developed economies is more or less stable, it will still rise for another generation at least in the emerging world. In another 100 years’ time fossil fuels will be much less important. But in 20 years’ time they may be more so.

The reason for such uncertainly is the pace of technology. Some things are moving at a reasonably predictable pace. Incremental advances in energy efficiency are making new cars and new aircraft more efficient every year. Homes are being better insulated. Technology is streamlining distribution.

Other technologies are less predictable. The cost of solar power and of storage of electricity is falling much faster than predicted. The cost of nuclear power is rising quite sharply rather than falling, now that decommissioning costs are being properly considered. If nuclear power continues to shrink as a proportion of primary energy supply, other non-carbon sources of energy will have to rise very fast to offset this. Indeed, if coal use goes down, it is almost inevitable that oil and gas use will continue to rise for at least a couple of decades.

The implications of this for Saudi Arabia are that it has some time to make its transition. The cash from the sale of shares in Aramco should enable it to build its Public Investment Fund from $160bn (£110bn) to $2,000bn. To put that in perspective, it would mean it would a wealth fund roughly the same size as the UK’s national debt. Or looked at another way and depending on the price at which shares could be sold, the market value of Aramco could be five or 10 times that of Exxon, the largest oil company in the West. But that, in a way, is the easy part. Building a different society with a wider economic base will be much harder.