Oil Subsidies and Renewable Energy in Saudi Arabia: A General Equilibrium Approach

Abstract

In 2016, the Kingdom of Saudi Arabia (KSA) announced its Vision 2030 strategic plan incorporating major changes to the economic structure of the country, including an intention to deploy 9.5 GW of renewable energy in an effort to reduce the penetration of oil in the electricity generation system. This paper assesses the macroeconomic impact of such changes in the KSA, coupled with reductions in implicit energy subsidies. Based on a dynamic general equilibrium model, our analysis suggests that if the KSA government were to deploy a relatively small quantity of renewable technology, consistent with the country’s Vision 2030 plans, there would be a positive impact on the KSA’s long run GDP and on households’ welfare. However, we demonstrate that if the integration costs of renewable technology were high, then households’ welfare would be maximized at around 30–40 percent renewables penetration. In addition, we show that a policy favoring renewable energy would increase the dependence of the KSA on oil, given that a larger share of GDP would be linked to oil exports and so, potentially, to oil price shocks. Finally, it is shown that exporting significantly more oil onto the international market could have a negative impact on the international oil price and thus could offset the potential gains from the renewable energy policy

The Value of Saving Oil in Saudi Arabia

“…We have expanded the Blazquez et al (2017) model in four main directions. First, we have treated the production of oil and natural gas as policy variables that can be changed.…”

“…To explore the impact of these policies at a macroeconomic level we use and extend the small open economy dynamic general equilibrium model for Saudi Arabia introduced by Blazquez et al (2017). Saudi Arabia is a critical player in the international oil market and changes to its production or exporting policy can cause a market reaction.…”

“…Such models have been used to analyze the macroeconomic effects of energy price shocks (Kim and Loungani 1992;Rotemberg and Woodford 1996) to understand the impact of fossil fuel subsidies in economies (Plante 2014;Lin and Li 2012;Schwanitz et al 2014), and to analyze optimal policies (De Miguel andManzano 2006 andGolosov et al 2014). Nevertheless, previous research has seldom specifically examined Saudi Arabia using macroeconomic models, other than Blazquez et al (2017) who analyze renewable energy development and energy pricing policies using a dynamic general equilibrium model, and Gonand (2016) who analyzes the impact of higher energy efficiency using an intergenerational macro model. Moreover, as far as we are aware, no previous effort has been made to analyze the different policy initiatives in Saudi Arabia explicitly aimed at saving oil in order to increase exports, which we attempt here.…”

“…The Model T he model used in this study extends a general equilibrium model for a small open economy calibrated for Saudi Arabia, as detailed in Blazquez et al (2017). The model has a representative infinitely-lived household that consumes final goods and energy services.…”

“…Natural gas production -net of demand in industries with allocations -is sold domestically to the electricity company at an administered price. Furthermore, in the Blazquez et al (2017) model, the Saudi Arabian government owns the electricity company, which uses oil, natural gas, and renewable energy to produce electricity that it then sells to a competitive energy services firm. In the model, the price of electricity for consumers is fixed to cover the costs, so there is no profit or loss.…”