Friday, January 16, 2015

How the Oil Price Slump Helps Renewable Energy

Intuition suggests that the current sharp correction in oil prices must be bad for the deployment of renewable and other alternative energy technologies. As the Wall Street Journal's Heard on the Street column noted Wednesday, EV makers like Tesla face a wall of cheap gasoline. Meanwhile, ethanol producers are squeezed between falling oil and rising corn prices. Yet although individual projects and companies may struggle in a low-oil-price environment, the sector as a whole should benefit from the economic stimulus cheap oil provides.

The biggest threat to the kind of large-scale investment in low-carbon energy foreseen by the International Energy Agency (IEA) and others is not cheaper oil, but a global recession and/or financial crisis that would also threaten the emerging consensus on a new UN climate deal. We have already seen renewable energy subsidies cut or revoked in Europe as the EU has sought to address unsustainable deficits and shaky member countries on its periphery.

Earlier this week the World Bank reduced its forecast of economic growth in 2015 by 0.4% as the so-called BRICs slow and the Eurozone flirts with recession and deflation. The Bank's view apparently factors in the stimulus from global oil prices, without which things would look worse. The US Energy Information Administration's latest short-term forecast cut the expected average price of Brent crude oil for this year to $58 per barrel. That's a drop of $41 compared to the average for 2014, which was already $10/bbl below 2013. Across the 93 million bbl/day of global demand the IEA expects this year, that works out to a $1.4 trillion savings for the countries that are net importers of oil--including the US. This equates to just under 2% of global GDP.

Although the strengthening US dollar mitigates part of those savings for some importers, it's still a massive stimulus--on the order of what was delivered by governments during the financial crisis of 2008-9. Even after taking account of the reduced recycling of "petrodollars" from oil producing nations, which have historically invested billions of dollars a year outside their borders, the pressure on governments to reduce expenditures on programs including renewable energy should be lower than it would be without this unexpected bonus.    

Just as the arrival of $100 oil in the last decade didn't produce an overnight transformation to renewable energy, $50 oil seems unlikely to harm the sector much, particularly in light of the cost reductions that wind, solar PV and other technologies have demonstrated in the last several years. If developers use this opportunity to shrink their costs further and become economically competitive with low or no subsidies, they will be well-positioned when oil prices inevitably recover, whether a few months or a few years in the future.


Dorkyman said...

What a stupid article.

It's like the Global Warming zealotry. Temps going up, gotta be Global Warming. Wait, temps going down? Still has to be because of Global Warming. So nothing can disprove Global Warming to these people.

High oil prices? Boy, that'll help alternative energy. Low oil prices? Wow, lots of growth in the economy, surely that has to help alternative energy, too.

Geoffrey Styles said...

I can see from your comment that you're not familiar with my work. Among other things, I adhere to the old view that a scientific hypothesis must be falsifiable, i.e. it must allow for the possibility of evidence that would disprove it. So no, I don't regard every conceivable environmental signal as evidence of anthropogenic climate change.

Back to the topic at hand, the point you want to dismiss is that renewables will do better in a stronger economy, even if oil prices are low, than in a lousy economy, even if oil prices are high. I believe that's especially true now, with the cost of renewables having fallen and with the likelihood of massive new subsidies targeted at renewables in the event of another financial crisis extremely low.

Dennis Frank said...

Geoffrey, it seems to me that your point is that market discipline is good for the development of renewable energy. Increased price pressure from cheap oil forcing producers of alternative fuels to adopt further strategies to become competitive, I mean. If so, I agree that such producers are more likely to succeed by becoming resilient enough to ride up an incoming wave as well as coast down an outgoing one (to use a nautical analogy). But I've been wondering if the current collapse in the oil price is sufficient to invalidate peak oil theory - which had hitherto seemed sensible, well-grounded in evidence, and robust enough to withstand prior attempts to discredit it.

What's your opinion on this? Can you point me to any online site where experts are discussing the question?

Geoffrey Styles said...

I don't think the current price collapse invalidates Peak Oil theory any more than the price spike of the previous decade validated it, contrary to a lot of breathless rhetoric at the time. However, the factors behind the price drop, especially the rapid growth of US tight oil production, do cast serious doubt on our ability to predict the timing or level of a peak in production. We're now producing from source rock, which strikes me as a fundamentally different game than the one King Hubbert described.

So while maybe not invalidated, I see the market losing interest in the meme of Peak Oil as something useful and considering alternatives like Peak Demand and the Carbon Bubble, which seems equally flawed as a predictive tool. See:

As for other sites, I'm not sure where to point you now that the Oil Drum is only an archive.