The tumbling price of crude oil is rattling investors in renewable energy, who fear new investment projects may not be economically viable. Simon Wilson reports.
What are the effects of cheaper oil?
Most analyses of the recent oil-price slump have focused on geopolitics and the global economy. So far, it has been the key factor in Russia’s currency meltdown, and is likely to have similar destabilising effects on other politically fragile countries that are highly dependent on oil – including Venezuela, Nigeria and (more arguably) Iran and Saudi Arabia.
Meanwhile, lower prices should have positive effects on net oil importers, including Japan, India, China – and, indeed, the UK. However, there has been less discussion about how this may affect the growth of alternative and renewable sources of energy.
What’s the connection?
If oil remains cheap, the economic case for renewables starts to look less attractive. In the past, governments have tended to ramp up spending on subsidies for renewables, such as wind and solar power, in the face of rising oil prices.
The last big drop in oil prices, in the early 1980s, led to a dramatic fall-off in investment. “Renewable energy subsidies have been mostly sold to the public on the basis of the economic benefits,” says Peter Atherton, an energy analyst with Liberum Capital, in an interview with The Independent.
“But the economic arguments hinged on the idea that fossil-fuel prices would get more expensive, while expensive renewable subsidies would be able to come down over time. That’s looking doubtful now.”
Does everyone agree with this analysis?
Investors appear to have some sympathy for it. In the wake of oil’s decline this year, renewable energy shares have lost considerable ground. For example, the Powershares WilderHill Clean Energy exchange-traded fund is down around 35% from its March peak.
On the other hand, many analysts say the lower oil price won’t do any significant damage to the demand for renewables, pointing out that the world is now a very different place from 30 years ago.
What has changed?
Not only are renewable technologies more advanced and more affordable, the political will to decrease reliance on fossil fuels is greater.
Climate change is seen by policymakers in the world’s biggest economies as a core strategic issue, and there’s a plethora of local and national incentive policies for renewable power around the world that offers renewables a buffer against fluctuations in the oil price.
So while oil companies scramble to mothball projects that are not economic with oil below $70, developers are on course to invest more than $250bn this year on wind, solar, geothermal and other types of renewable power, according to Reed Landbergof Bloomberg.
“Renewables are supported by policies, and that’s not something that will be amended quickly just because of oil prices,” says Takashi Hongo, an adviser to the Japanese government. “There will be hardly any impact.”
Is it just about subsidies?
Not entirely. Oil and renewable energy are often not in direct competition for the same markets and are not usually seen as substitutes for each other. In particular, crude oil is not a major source of power generation (only 5% of global power generation today, compared to 25% in 1973, according to IEA figures), while power is the main role played by renewables in many countries’ energy mix.
In addition, costs for oil and renewables are heading in opposite directions, says Bernstein Research. Right now “renewable and fossil-fuel cost per unit of energy are roughly comparable in many places”.
However, “renewable energy is a technology. In the technology sector, costs always go down. Fossil fuels are extracted. In extractive industries costs (almost) always go up”. That trend implies we can expect renewables to prosper, even in the face of cheap oil.
What if oil gets even cheaper?
Again, views differ. Lin Boqiang of Xiamen University told Bloomberg that “if oil stays at current prices or weakens through the first half of next year, the impact on new energy would be massive”, since governments would come under intense pressure to cut subsidies.
On the other hand, Xizhou Zhou of IHS Energy points out that coal is widely used for power generation in China and has always been cheaper than renewables – but a 40% to 60% slump in coal prices in recent years hasn’t dented the growth in China’s renewables business.
What’s more, attitudes to the environment are changing, so lower oil prices don’t automatically mean that consumers will once again become “gas-guzzling monsters”, reckons Jeffrey Ball in The New Republic.
“Times have changed since the dawn of the last era of cheap oil. Even assuming low oil prices are the new normal, a cleaner energy system probably is too.”
The outlook for oil investments
Almost $1trn of spending on future oil projects is at risk because the investments will not be economic, following the plunge in crude oil prices, according to Goldman Sachs.
The investment bank’s analysts examined 400 oil and gas fields around the world, many of which are awaiting a final investment decision. It found that with oil at $70 per barrel, fields representing 2.3 million barrels per day of output by 2020 (and 7.5 million by 2025) have become uneconomic.
The Goldman findings are significant, given that 7.5 million barrels is 8% of global demand, reports Christopher Adams in the FT. However, they also suggest that “the supply glut that has sent prices tumbling could soon vanish as the oil majors delay big-ticket production projects”.