The price of fuel has fallen dramatically in recent months, and the culprit is the lack of profitability in the international oil market. While cheap fuel has traditionally meant bad times for the renewable energy sector, this time it’s going to be different.
Fossil fuel investors unsatisfied with their returns are going to seek opportunities elsewhere, namely by riding a wave of optimism in the potential of renewable energy following the recent climate talks held in Paris.
The price of oil hasn’t been this low, around 27$, since the Iraq War in 2003, and while there has been some recent upward movement, investors are lacking confidence in the industry’s future, having already lost over $700 billion of their money. The stock prices of major fuel companies have plummeted and this has had a knock-on effect: most forecasts project the continued flow of investment away from the fossil fuel industry for the foreseeable future.
Why is Oil so cheap?
Simple, there is too much of it on the market. US shale production has doubled since 2008, and this has left OPEC unable to control the price of oil and its derivatives to the same degree they have previously. Making matters more complicated, there’s the fact that Iraq and Iran are as unwilling to reduce their production as the Saudis. Combined with reduced demand from China, the outlook for oil is grim.
The impact on the renewable industry:
Cheap oil may not be the enemy after all, but instead, it’s cheap electricity or even cheap coal that could pose the real challenge for growth in the renewable sector. Morgan Stanley are forecasting with confidence that oil will eventually drop to $20 a barrel, but meanwhile, investment in alternatives is booming, with a 13% increase and over 1.2 million added jobs since 2014. Time will show that on basic cost, conventional energy can’t compete with renewable alternatives.
Paris talks and beyond:
Following the talks, investors are showing that the renewable industry can be financially competitive. Through the United Nations, the Green Climate Fund (GCF) was created and is already backed by an initial capital estimate of $10 billion. Combined with other new financial vehicles, there are growth opportunities to be found, with six major industry players offering investors a return of 5%-7% on their capital. This is not luck. Smart investors are being driven to the renewable sector, which will continue to benefit in terms of growth and investment as long as oil remains so cheap.