Given the default assumption that fossil fuel use drives worrisome climate change, to what extent will cheaper oil impair a shift toward a greener energy grid?
Full disclosure: I have an ulterior motive. I’m interested in where to invest. I don’t have much personal concern about climate change because I don’t think we are very good at predicting much of anything. But for an investor, those types of personal opinions are irrelevant.
What I am interested in is opinion/debate about whether cheaper oil is a substantial barrier to (for example) renewables or not. I’m willing to guess that oil is going to stay relatively cheap–or at least have a predictable ceiling. I’m not so sure about whether or not the sentiment that fossil fuels are destroying our future is so strong that we’ll give up our addiction to frack and pursue renewables if the cost differential is anything other than trivial.
I was this close to pulling the trigger on a couple solar and wind-related ventures. (NRG’sinvestment in personal renewables, as a specific example of company initiatives that pique my interest.)
Cheaper oil may have an effect on green energy investment decisions. However, I think it will be a marginal effect. The green energy sector will continue to be attractive whilst subsidies are in place.
Long term trend line pricing for oil is going to go up, but prices are going to be low in the short and maybe medium term, and a lot of major oil consumers are going to be hedging their supply as much as possible by locking down those low prices into contracts. That being said, renewable research and construction is going to continue, and I’d expect some of the big consumers at least to put some of their savings into renewable projects to keep their prices down for as long as they can.
As an investor I look more to big utilities to continue and possibly accelerate their acquisition of solar and wind projects. I think large scale commercial projects will do better in the energy environment over the next couple of years than individual projects. It’s going to hurt the conversion to electric vehicles and keep solar panels off people’s roofs in a lot of cases. There’s risk in being an early adopter of new technologies like solar panels, and if there’s no payback, why take the risk?
I don’t know that I’d sink new money into oil at the moment, there are going to be years of poor returns, longer term you’ll almost certainly be in the green if you’re investing in big players. A lot of the mid-major producers have taken on immense amounts of debt to buy up as much drilling rights as possible, and at depressed prices some of those companies may collapse (and be bought on the cheap by oil majors that can weather years and years of this, and who are diversified enough and have enough projects with sunk costs already pumping oil that they can turn a profit even at $40/barrel prices.)
I tend to be optimistic on both renewables and climate. I see more political concern about climate than ever before, and until I believe this year the United States had been on a downward trajectory on carbon emissions. I think it’s really important that China seems genuinely committed to improving its emissions profile as well. One thing that helps is the Chinese burn so much coal in such a dangerous way that many Chinese cities have serious and immediate lung health and general health problems because of the sheer mass of particulate coal mass in the air. Writers have written about seeing “black specks” in their vision throughout the day in some parts of China (these are small flecks of coal that are always in the air in some of China’s city’s where homes are still heated by coal fed furnaces.)
I think America has started a move away from the worst fossil fuel (coal) in power generation that will not be altered, we are going to continue moving away from it. The one place where I think lower oil prices will hurt the climate in the nearer term is car buying decisions. Consumers ended up being very sensitive to the price of gas at the pump and SUVs had serious sales problems because of it, it lead to a new generation of smaller SUVs (Crossovers) and cars in general that pushed higher and higher mpg, and that’s not even talking about actual hybrids, plug-in hybrids and electric cars, but just vastly improved mpg on the typical gasoline cars Americans were buying. If gas stays down below $2/gallon I think people buying new cars are going to go back to their old ways of caring less about mpg.
That being said, Federal regulations are going to continue pushing car companies even where consumers aren’t. There is a core of consumers who have started making car buying decisions not purely based on home economics but on climate concerns.
One of the most important things in renewables is the continued drop in the price of generation, this is showing that as renewable production scales and ingenuity and innovation drive improvements renewables can get close to and sometimes beat traditional fossil fuels on generation price. But, green energy companies tend to be the wild west. Most are new, and government subsidies while a good policy for a nascent and important industry tend to allow bad companies to survive where they shouldn’t, in the aggregate it’s good for us, but on the individual level of decision making facing an individual investor I think it’d be really easy to bet on a bad green energy company that is going to go belly up. I’d probably not invest in green energy or fossil fuels right now.
If I was to invest in the energy sector it’d be in a secondary way, primarily in companies that store and transport, not those whose bottom line is directly linked to commodity prices. Pipeline concerns and rail.
FWIW this is a place where a classical free market advocate like myself believes in a response and adaptable government response. The tax on fuels should be utilized to keep prices above a certain point to discourage poor decision making and to fully price in the externalities of fossil fuel use. In classical economics externalities are a very traditional area where government has a job of stepping in, and when a certain product is causing global climate harm it makes sense when underlying commodity prices collapse, which would typically increase demand and use of the commodity, to limit any increase harm.
And the important thing to never forget is that it is the emissions that are the problem, not the oil itself, I will have to point out that the issue of the actual costs of the emissions for human health, the costs of not controlling our emissions for our coastal cities, and weaning ourselves out of middle eastern oil (one big reason why the west did not freak out -as in invading again- because of what is happening in the middle east rigth now is because the west became more productive and not only in oil and gas, but in renewables) are still important reasons why one should continue considering investing in renewables.
Most of the people I looked that report on the cheaper oil in the context of renewables is that this will not be a permanent thing, and both economic, health and environmental pressure will come into the picture coming from government and even private industry to either tax the emissions or regulate them, making the renewabels an still attractive investment.
The point here is that one should not concentrate only on what the oil prices are doing to the renewables, but to take into account what is happening to the fossil fuel industry too.
The thing about investing in individual companies is you have to base that investment on the fundamentals of the company. Green energy companies remain too much like the Wild West for my taste, I don’t believe the average investor, or even the sophisticated investor, will do much better than “pure luck” on picking which of these companies will succeed and which will fail.
If I wanted exposure to renewables I would probably investigate traditional and established manufacturing companies that are producing some of the parts that go into renewable power generation. Those kind of companies you know more about the management team and track record, and can still profit from a growth in renewable energy.
A dozen years ago I invested $1000 in German windmill companies and took profits about a year to a year and a half later when it was up to $8000. The technology had matured and they were looking to build larger windmills. The thing with a larger windmill is that when you double the radius of a windmill, you square the area of wind you are harvesting. The size of the gears and machinery follows a doubling, but needs to handle more loads by the square. At this time materials strength was also undergoing a revolution. Those may still be true.
In any event, windmill construction seems to be a safe long term investment, the weak link being power storage. Smart utilities will look into very large storage systems or go bankrupt. The transmission lines are one of their major assets, but as a bird watcher, I can tell you that transmission lines (at least in California) are an asset that is deteriorating. They look like shit. And there are a lot of dead birds of prey at the base of them. The utility now seems to be putting up either perches or barriers to the tops of poles to protect the birds, but transmission line condition, particularly poles, is abysmal.
Solar seems to have enough changes going on that using Blu-Ray disc manufacturing technology in the making of cells will increase the efficiency to close to 40 percent. This will make them very profitable when it hits the market. After a quarter century these cells will still be 20 percent efficient. Again, the problem is storage. Figure out how to efficiently store renewable energy and you will be as rich as Rockefeller.
There is some regulatory uncertainty. While a restriction on carbon emissions is the big one, EPA will likely lower the allowed levels of tropospheric ozone.
Cheaper oil is putting a major strain on oil producers. I would imagine this is leading outside investment into other areas.
Would you invest in alternative energy at a time when oil is cheaper than it has been in years? Almost certainly not, although now might be the time. The unfortunate reality is that a lot of research into alternative (green) energy comes from…oil companies. With strained margins, this research will almost certainly be the first on the cutting block.
Green energy won’t really take off until it is more cost-effective for a large energy firm to build a windmill than an off-shore rig. That time won’t be for a while, it seems. The current low prices are due to a glut of the black gold.
Not sure where that “a lot” comes from, what I remember is that most oil companies dropped a lot of their renewable efforts a few years back, with Shell being one of the few that did increase that research.
True the end uses of oil and gas/coal don’t appear to overlap a great deal, but they do enough for the price of one to affect the other two on a macro level to a considerable degree. And besides, one main technology contributing to the recent decline in the price of oil (‘fracking’) has also significantly increased US production and economically recoverable reserves of natural gas. In both cases (oil and gas) there’s been less impact outside the US, even though generally similar geology to the US ‘shale’ plays exists in a number of other places. But that may change and trend become wider spread.
And if both oil and natural gas follow a distinctly lower price path than many people have assumed (even with reasonably healthy world economic growth) then that could have a significant negative impact on renewables as a business. CO2 emissions could still be reduced (or their growth curtailed) by more by substitution of gas for coal, which is the main reason they’ve tended to decline in the US recently more than in some countries with more aggressive renewables subsidy programs.
Renewables as a business rely heavily on subsidies, whatever the hopes (dreams?) that they might ever grow to a large % of energy generation without heavy subsidies. So the fact that renewables will need subsidies doesn’t necessarily mean ‘don’t invest in renewables’. Plenty of money has been made investing in subsidized renewables. But in the medium to long run the price of fossil fuels, particularly gas and oil, definitely matters to the renewables business, because somebody has to pay those subsidies, and the public though perhaps slowly and incompletely comes to understand that it’s them (this is what you see in eg Germany lately). So the bigger the subsidies have to be, the more likely they run into a political wall before renewables grow to a really significant % of energy generation. And one factor in how big the subsidies have to be is the price of conventional energy. Another factor is of course the cost of renewables, but again investment to lower that cost is at least partly a function of how cheap they need to be to compete (or come within a given distance of really competing) with conventional energy sources. Stuff like public awareness and education (and scaremongering?) about climate change is another factor, but presumably a constant.
Somebody said that the price of oil (and let’s extend it to nat gas) will still be very high in the long run. I don’t know if that’s true, nor do I think anyone else does, depending how you define ‘high’ and ‘long run’.
I think a lot of companies in the renewable space have been dragged down by the price of oil irrationally. I don’t know if people just lump everything together as ‘energy’ in their minds, but oil doesn’t really compete much with solar or wind. I personally think there are a lot of bargains in the renewable sector right now and am snapping them up as much as my budget allows.
What I predict is this: oil sinks lower and lower until frackers are forced to stop producing. This leads to a supply crunch and oil soars to new highs. Rinse and repeat a few times over the next 2 decades. Point is, if renewable stocks are chained to the price of oil, rationally or not, a spike in oil could drive a spike in these stocks. If you can hold for a couple years while that plays out, I think you will make money in renewables.
This point reveals how this conversation hasn’t been framed properly, at least IMHO. Renewables aren’t going to rely on subsidies. Wind power is already the cheapest option in many places, and solar is also competing with natural gas in sunny places. These are just the facts.
So it isn’t quite accurate to frame these as ‘climate change’ investments- that’s almost a political/polemical statement with some people. It is natural for some worldviews to segue from that to the suggestion that these techs are forever freeloading off of true, hardworking Americans through subsidies- you could almost believe they were liberals. But renewables are serious competitors which will make somebody a ton of profit, which is more of a balance sheet statement. The question is which companies’ balance sheets and prospects look the best.
I haven’t quite decide which trigger to pull: Oil, because it’s a good idea to buy on the bad news, or perhaps Renewables because they get hurt by cheap oil even if their fundamentals don’t change and even if oil does not (directly) compete with Renewables.
I don’t see oil staying down for long, personally. Right now the price war is a chicken game between the Saudis and the North American extractors, with a lot of collateral damage to other exporters. I think the Saudis have more to gain by letting prices rise again once they have shown who is boss.
If that scenario is right, it’s time to take advantage of artificially depressed renewables.