“I believe solar will be even more economic than fossil fuels.”

That’s probably a quote from the head of some environmental group, right?

Nope! It’s a quote from Ali Al-Naimi, the Oil Minister of Saudi Arabia.

Yes, Saudi Arabia, a kingdom rich in oil, is planning to transform itself into a major producer of solar energy.

Out-of-Control Energy Demand

This seems like quite an odd shift for a country that makes so much money off oil. But, the Saudis have a problem.

You see, a quarter of all of Saudi Arabia’s oil output is burned domestically. Electricity is a particularly sore point. The country currently burns as much as one million barrels of oil per day just to generate electricity for its rapidly growing economy. That’s about 15% of its exports! And that usage is only set to grow if the Saudis don’t change course.

One of the issues is that the country’s power plants and other infrastructure are old and inefficient. Its air conditioners are also wasteful and account for about 70% of the country’s total electricity usage.

Plus, the Saudis subsidize electricity to their own citizens, selling it for as little as $0.01 per kilowatt-hour.

In the long term, the royal family is concerned that electricity consumption is the beast that will swallow up all of their oil production – consumption rises 10% to 11% annually. This growth in electricity consumption has made Saudi Arabia the world’s sixth-biggest consumer of oil, despite having a population of only 30 million people.

Saudi fears were backed up by a 2012 report from Citigroup. The study said that if domestic demand for oil continued at its current pace, Saudi Arabia could be a net oil importer by as soon as 2030!

It’s tough to remain the global oil kingpin when most of your oil is being burned domestically and sold to electric companies for a mere $4 per barrel.

Thus, the Saudis’ turn toward renewable power isn’t really that surprising.

Letting in the Light

Saudi Arabia’s rulers plan to move aggressively to improve the situation. The Kingdom will become a “global power in solar energy,” said Al-Naimi. Its end goal is to become THE exporter of solar power, like it is with oil today. Three years ago, Saudi Arabia announced that it would have 41 gigawatts of solar power capacity by 2032.

That’s more than Germany – the world’s leader in solar power capacity – has today.

Next year, Saudi Aramco, the world and Saudi Arabia’s biggest oil company, and the Saudi Electric Company will begin construction on 10 solar power projects around the country.

The Saudis are aided in their mission by the falling cost of solar panels, which have dropped by about 75% since 2009.

“Only four years ago, solar power didn’t make sense because it was not competitive. But in the past 18 months, there has been a big change,” said Paddy Padmanathan, the CEO one of the region’s largest renewable energy companies, ACWA Power, to theFinancial Times.

Funding Getting Tougher

With Saudi oil selling for about 40% less than it was just a year ago, it’ll be harder to fund the grandiose solar projects. Still, the Saudis are starting from a good place.

Government debt, which was once near 100% of GDP, is nearly non-existent today. And its government has had budget surpluses in every year but two since 2001. It also has nearly $700 billion in foreign exchange reserves, according to the IMF.

But this year the Saudis will experience a massive budget deficit thanks to those low oil prices combined withrising domestic spending. The IMF forecasts it will be around 20% of GDP, or about $130 billion.

This deficit may slow the Saudis’ solar ambitions, which will also face some tactical problems, such as producing power during a raging sandstorm.

But the real question Saudi leaders need to answer is whether the Saudis’ continuing war with U.S. shale oil producers is hindering their move toward solar power. They may find they need to step away from the battle.

And the chase continues,

Tim Maverick