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.
Photo Credit: Oil Price Drop and Renewabes/shutterstock