Abacus | It’s a gas: with Saudi Arabia, Japan and China pivoting to clean hydrogen, should Hong Kong be next?

Saudi Arabia has been looking to diversify its economy ever since its reliance on the stability of high crude-oil prices exposed a glaring weakness in its long-term financial planning. The problem is that Saudi Arabia does very little other than pump oil. As long as consumers around the world are gluttonous consumers of oil at high prices, everything is fine, and the demand side of the pricing equation remains strong. But as people become more frugal or something, say a global pandemic, disrupts travel and economic activity, the house of Saud’s family finances come under strain. According to the International Monetary Fund, Saudi Arabia needs oil to trade at US$66 per barrel just to balance the budget this year.

On the supply side of the pricing equation, US shale oil exploration and extraction presents another problem for Middle Eastern oil economies. Historically, it was both expensive and difficult to extract shale oil, and it took a long time to develop techniques that lowered the cost enough to make it worthwhile. For the United States, fracking technology was the fix that allowed pumps to be profitably switched on when the price of oil is over US$50 a barrel. Lower than that, and the pumps can be switched off. This suggests the longer-term price of oil will be capped even if demand returns to some pre-Covid-19 normal.

At the same time, global energy generation has started to shift away from fossil fuels towards greener technologies. In seeking to diversify and reduce its dependence on oil, Saudi Arabia is aiming for another energy source currently in very limited supply – hydrogen – and is spending US$5 billion by 2025 just to get started.