[Graeme]

Oil Price Volatility, Economic Growth and the Hedging Role of Renewable Energy

This paper investigates the adverse effects of oil price volatility on economic activity and the extent to which countries can hedge against such effects by using renewable energy. By considering the Realized Volatility of oil prices, rather than following the standard approach of considering oil price shocks in levels, the effects of factor price uncertainty on economic activity are analyzed. Sample countries represent developed and developing, oil importing and exporting and service/industry-based economies. The paper finds that the sensitivity to oil price volatility varies widely across countries and discusses various factors which may determine the level of sensitivity (such as sectoral composition and the energy mix). This implies that the standard approach of solely considering net oil importer-exporter status is not sufficient. Simulations of volatility shocks in hypothetical energy mixes (with increased renewable shares) illustrate the potential economic benefits resulting from efforts to disconnect the macroeconomy from volatile commodity markets. It is concluded that expanding renewable energy can in principle reduce an economy's vulnerability to oil price volatility, but a country-specific analysis would be necessary to identify concrete policy measures. Overall, the paper provides an additional rationale for reducing exposure and vulnerability to oil price volatility for the sake of economic growth.

eldis

[ROCKMAN]

Graeme - Makes mucho sense. But I think that same price volatility hinders alt development to some degree. All infrastructure investments hinge on the economic payback time frame. As an example consider the NG price boom back in '08. Companies raced to build LNG import terminals in the US just in time to see their plans crash when prices fell almost 80%. I can imagine a number of alt projects were hurt because they were based upon competing against high priced NG. Today folks chatter about CNG for vehicles but investors understand the long time frame to first build out such infrastructure and to recover that investment. While such projects may look viable at $4/mcf today the price might be 2X to 3X that not too many years down the road. Thus resistance to such investments develop. The declining cost of some alts are helping but I suspect more on smaller individual-based projects. Mega-alt projects probably have to build in the volatility factor at both a positive and negative level.

[Graeme]

ROCKMAN, Thanks for your comment but I think you missed the main conclusion of the study, namely that it provides "further rationale for implementing policy measures which disconnect a country’s macroeconomy from volatile oil markets". It should be of particular interest to engineers, and it provides support for policies in countries like Germany who are shifting away from fossil fuels and nuclear. However, I noticed that the authors regard nuclear as one of the alternatives to ff. This is of interest because of the recent announcement (see nuclear thread) by Hansen et al who want nuclear in the world's energy mix.

To reduce the overall exposure to volatility, it is necessary to increase the elements of lower price volatility in energy generating portfolios. In this sense, the main alternatives to fossil fuels (nuclear and renewable energies),
both classify as ‘low volatility’ assets, as they are sourced independently of volatile global fossil markets (i.e. domestically). While this study focuses on renewable energies, nuclear energy is also argued to be an important carbon-free source of energy with various benefits such as being non-location specific and scalable (see Kessides, 2010, for an evaluation).

Critics regard nuclear as expensive but I suspect that costs could be reduced if smaller modular units are built. If that's the case, then introduction of nuclear could be justified.