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Page added on January 26, 2015

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Falling Oil Prices Won’t Hurt Clean Energy

Alternative Energy

The price of crude oil has crashed in the past few months. That’s bad for the clean energy sector, right?

Actually, not necessarily. Not only do falling oil prices have limited impact on clean energy, but the latest price volatility only underscores how unstable petroleum sources remain and so accentuates the value of clean sources.

There are two principal reasons why the clean energy industry will not be swamped by the petroleum glut.

To begin with, while all commodities in the energy industry are to an extent intertwined, oil and renewable energy do not directly compete with each other. Oil is primarily used to produce transportation fuels while renewable energy is used to generate electricity. The International Energy Agency points out that diesel and other petroleum-based fuels constitute only 5 percent of global power generation today compared to 25 percent in 1973. Fluctuations in oil prices, therefore, will have little impact on renewable energy sources like solar, wind and biomass in advanced economies, ensuring that the economic proposition of those resources remains highly compelling in the long run.

Second, over the long run there is an important price difference between energy derived from technology-based sources like solar and wind and that derived from commodity-based sources like coal and oil. Over the long run the cost of energy from the former invariably declines as technology innovation proceeds.  For example, a recent energy cost analysis by investment firm Lazard confirms that the cost of energy from utility-scale solar and wind farms has become widely competitive with electricity produced from conventional fuels like coal, natural gas, and nuclear, even without subsidies in some markets—with the cost of utility-scale solar falling 80 percent and wind energy falling 60 percent in the last five years.

On the other hand, commodities-based sources, which are finite and expensive to locate, extract, ship, and refine, are inherently subject to price volatility. While the U.S. shale boom driven by advancements in fracking technology has generated expectations of cheap U.S. gasoline, it is also one of the contributors to the recent volatility in oil prices. And no one knows for sure how long the production boom will last, with the U.S. Energy Information Administration projecting that even under favorable conditions U.S. shale oil production will peak by 2020 and then decline.

To be sure, the oil price crash will cloud the near-term market outlook of a few clean energy technologies such as electric vehicles that do compete with oil-based transportation. However, over the long-term the scale up of EVs too appears inevitable. Oil prices can only go up while most clean energy technologies are only at the beginning of a rapid price decline due to manufacturing and efficiency improvements.

In short, oil prices won’t likely affect renewables and clean energy. On the contrary, last year—when global clean energy investment increased by 16 percent to $310 billion even as oil prices plummeted—proves how strong the clean energy industry really is.

Energy Collective

8 Comments on "Falling Oil Prices Won’t Hurt Clean Energy"

  1. Plantagenet on Mon, 26th Jan 2015 6:43 pm 

    One place where the oil glut is likely to affect renewable energy is in the demand for electric cars. With gasoline cheap, high priced electric cars become somewhat less competitive in the marketplace against ICE cars.

  2. Speculawyer on Mon, 26th Jan 2015 6:55 pm 

    The falling oil prices have already hurt renewable energy a little bit but purely for dumb market psychology reasons. Basically, traders don’t know a damn thing about engineer so they think why would people buy solar when oil is cheap.

    But oil is for transportation and renewables are for generating electricity. Less than 1% of our electricity is from oil. They are completely different markets. So it is actually a good time to pick up some renewable stocks that have been beat down by people who don’t have a clue.

  3. Speculawyer on Mon, 26th Jan 2015 6:57 pm 

    Plant . . . low oil prices have hurt conventional hybrid cars. But plug-in cars have, so far, not been hurt by lower oil prices. I suspect the the lower end models will get hurt a bit soon. But Tesla probably won’t be affected. A person buying an optioned-up $100K Tesla is not really worried about the price of gasoline.

  4. GregT on Mon, 26th Jan 2015 7:04 pm 

    “On the other hand, commodities-based sources, which are finite and expensive to locate, extract, ship, and refine, are inherently subject to price volatility.”

    Solar, wind, biomass, and all other electric power generation technologies are also commodities-based sources. They all require finite resources in their manufacture, as well as energy derived from fossil fuels.

    This entire article is a bunch of hogwash, just like Plant’s insistence that the recent 55% drop in oil prices has been caused by ‘the oil glut’.

    The demand for electric cars Plant has been just slightly above zero, take a percentage of that away, and you are still left with slightly above zero. Irrelevant.

  5. J on Mon, 26th Jan 2015 11:20 pm 

    Funny how the Tesla guys still talk about cost savings when you walk into one of their stores.

    I once started on a conversation with them like: OK, so what would the total cost be if I drive 100K miles over 10 years. Oh, I’m just shopping around a little here for a good deal..

    -Eh. Um.

  6. Speculawyer on Tue, 27th Jan 2015 11:46 am 

    J . . . yeah, the Tesla cars are aspirational cars at this point. They’ve served a very useful purpose though. They’ve made electric cars cool, they’ve advanced the technology, they’ve shown that electric cars can not only be as good as gas cars but much better in many aspects.

    But a Tesla is far out of reach of most people. However, they’ve helped start a strong competition for plug-in cars. At this point, every major car manufacturer except Toyota and Chrysler have a serious plug-in car program. And we now have promises of 200 mile range cars priced in the $35K range coming.

  7. Makati1 on Wed, 28th Jan 2015 1:29 am 

    Tesla’s are for the techie elite or the techie wannabees, not real people. Nothing more than a high priced toy.

  8. Makati1 on Wed, 28th Jan 2015 1:38 am 

    BTW: If I had an income that allowed me to buy a $100K toy, I would be going off grid and settling into a nice small farm in some quiet country where they could not afford drones and armored PCs for the police. Where you didn’t get a strip search and full body X-ray to get on a plane or lose your property if you couldn’t pay the taxes for 20 years. Oh that’s right, I am doing that and I don’t have a $200K annual salary … lol.

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