Muhammad Javid

Inter-fuel substitution, driven by factors such as cost, resource availability, and environmental considerations, has emerged as a critical area of research. This topic is particularly relevant in the context of the global energy transition, as shifting from fossil fuels to renewable energy sources plays a crucial role in achieving decarbonization goals and fostering sustainable economic growth. Fuel substitution leverages the zero-emission potential of renewables, offering a pathway to balance environmental and economic objectives. The industrial sector is highly energy-intensive and heavily dependent on fossil fuels, accounting for around 25-30% of global energy-related CO₂ emissions (IEA), which can play a significant role in this transition. For oil-exporting nations, inter-fuel substitution can be a strategic tool to enhance energy security and economic diversification and to achieve CO2 emissions reduction targets. Reducing domestic oil consumption and favoring alternative fuels (e.g., natural gas, solar energy) can free up more crude oil for exports, generating revenue while advancing domestic decarbonization efforts. Substitution between fuels is consistent with the broader goals of economic diversification of oil-exporting countries. By investing in renewable energy and alternative fuels, oil-exporting countries can support new industries (e.g., green hydrogen production) and reduce their dependence on oil exports, which is crucial for long-term economic stability. In this context, the industrial sector of Saudi Arabia can play a pivotal role in achieving economic diversification objectives and fostering sustainable economic growth. This study examines the feasibility of fuel substitution in the Saudi Arabian industrial sector. It focuses, in particular, on estimating the own price and cross-price elasticities of substitution. Reliable estimates of these elasticities are essential for assessing the impact of climate change policies on fuel choice.

In this paper, we utilize the trans-log cost function, imposing local curvature conditions to examine the potential for inter-fuel substitution among natural gas, electricity, fuel oil, and diesel oil within Saudi Arabia's industrial sector. These curvature conditions ensure theoretical consistency with neoclassical microeconomic principles, particularly in maintaining curvature, positivity, and monotonicity, thereby reflecting realistic substitution behavior. The results reveal that own-price elasticities of fuel oil, natural gas, diesel, and electricity are negative, as expected by economic theory. The absolute values of the own-price elasticities are less than 1 for all energy products, indicating inelastic demand for all fuels. The substitution elasticities among various energy inputs are positive and exceed one, except between natural gas and diesel and between electricity and diesel. We find a moderate substitutability between natural gas and diesel and between electricity and diesel. 

Notably, the strong substitutability between oil products and natural gas and between oil products and electricity underscores the sector's capacity for adopting cleaner energy. The strong substitutability of cleaner energy products and oil products presents dual advantages: enhancing the country’s oil export potential and reducing environmental impacts. These findings provide valuable insights for policymakers aiming to balance economic growth, energy security, and environmental sustainability. The results also align with global evidence on inter-fuel substitutability, emphasizing the broader applicability of these conclusions in transitioning to low-carbon energy systems.