Domestic Solar & Oil Exports Are Natural Complements

It’s often seen as somewhat weird and crazy that the Middle Eastern governments who supply the world’s oil have begun intensive research into alternative power.  After all, they are sitting on top of huge reserves of petroleum!  Stories like this one from Quartz have a bit of a bemused tone about them.  That’s without even touching the “skepticism” (to put it lightly) around Iran’s development of nuclear power.  Yet I think it makes perfect sense in the larger context of comparative advantage.

The drive for Mideast solar is motivated by local markets in solar and global markets in petroleum. The Middle East happens to be richly endowed with both extremely high oil reserves and extremely high insolation, the amount of sunlight received.  However, oil prices are determined globally whereas sunlight can’t be exported.  So while a barrel of oil is worth the same amount of money and utility anywhere in the world, a solar panel is an asset with highly-variable value.  It costs the same anywhere in the world, but has a much larger benefit in sunny areas.  So the Middle East has access to abnormally cheap energy whether through oil or solar, but it can only export oil.

Farmers went through a similar transition as agricultural products were commoditized.  In the early 19th century, most American farmers grew a wide variety of crops for subsistence and would sell off any surplus to the markets.  However, as the cost of transit dropped and the market for agricultural commodities became better-developed in the mid-19th century, farmers began to specialize.  They would move from diverse subsistence agriculture into market-driven agriculture, which generally meant growing monocultures of wheat or corn or lettuce, and selling 100% of their production to the market.  They could then use the proceeds to buy all the food they wanted, courtesy of these same agricultural markets.  Eating the crops you had grown for the market became a sign of desperation, only done in the context of a price collapse in whatever you were selling.

Given the growing scarcity of oil, Middle Eastern leaders should think similarly.  Their current policy of lavishly subsidizing oil usage at home is the equivalent of eating the market-bound crops.  It is a waste of precious resources that are relatively much more valuable when exported than burned at home.  Especially given the relatively low cost to extract Middle Eastern oil versus exotic oil sources like Canadian tar sands.  The best course for their economies as a whole is very obviously to plow oil export profits into alternative energy products that will allow them to export greater shares of their oil.  Luckily, it appears that at least a few leaders are making the appropriate moves and I predict more will follow.

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