The biggest obstacle to alternative energy is money.
Saudi Prince Al-Waleed bin Talal seems to understand this. In a CNN interview, he admitted Saudi Arabia wants lower oil prices because it doesn’t “want the West to go and find alternatives.”
Alternative energy hasn’t taken off in the US because its development largely depends on the private sector. Currently, it’s simply cheaper buy oil from countries like Saudi Arabia, so not many private companies bother to develop alternative sources.
For example, if Saudi oil average $80 per barrel in the long-term, why bother extracting oil from oil sands and oil shale if doing so cost $85 per barrel? Why turn to electric cars if the whole ordeal – the research, electric cars, and electric grid – cost more than filling up convention cars with imported fossil fuel?
On the other hand, if oil skyrockets to $200 per barrel, it would make absolutely sense to develop oil sands, oil shale, and electric cars.
Experts generally put the threshold at which alternative energy becomes viable at a long-term sustained price of $80 per barrel.
A recent Federal Reserve research, for example, puts the figure for oil sands at $70 per barrel in 2005 terms, which translates to $77.5 in 2010.
According to Al-Waleed, Saudi Arabia probably estimates the threshold to be $80 per barrel.
The cost of many alternative energy sources is front-loaded. For example, once a solar farm is constructed and the electric grid is built, the cost of harvesting additional electricity becomes extremely cheap.
The danger for oil producers like Saudi Arabia is that once a sustained period of high oil prices induces the Western private sector to invest the upfront costs of setting up alternative sources, the price of energy will be lowered permanently.
The optimal strategy for Saudi Arabia, therefore, is to avoid a sustained period of high oil prices.
For Western countries, the optimal strategy to bite the bullet, pay the upfront cost, and save money in the long-run with cheap alternative energy sources.
Western capitalism, however, can be short-sighted and decentralized; if oil prices stay reasonablely low, not enough players in the private sector will have the resolve to eat the enormous upfront costs of developing alternative energy sources.