During previous times of turmoil, the Organization of the Petroleum Exporting Countries (OPEC) has been known to step in and cut oil production. However, OPEC's recent refusal to curtail oil production—despite a decrease in demand—has led to a dramatic collapse in oil prices.
Why did this happen? A major factor in the decision to maintain current export levels has a lot to do with non-OPEC big oil producers, such as the United States, Russia and Mexico, stepping up on production in recent years. By 2015, the U.S. is expected to reach its highest levels of oil production in four decades, which has proven to be problematic to OPEC. The decision not to curb production may have a lot to do with Saudi Arabia—the largest among OPEC members—and could be a test to see who will break first while oil prices continue to drop. In all of this shake-up, the Russian economy has suffered the most; the country announced it will likely enter a recession in 2015.
Meanwhile, it’s not just these countries that are affected. Lower oil prices mean a fall for solar, wind and biomass markets as well. A few industry leaders are unsure what results the current trend will have on clean energy.
The Impact of Oil Prices
As oil prices continue to plummet, many industry leaders are afraid of the negative effects this might have on the burgeoning clean energy economy. British entrepreneur Richard Branson recently suggested that “the collapse of oil prices is going to make it much more difficult for clean energy” and alleged Saudi Arabia was encouraging the dramatic drop in prices to damage the global clean energy industry. Branson encouraged governments to “think hard” about adapting to low oil prices, indicating they should not cut investments in renewables or slow down progress just because oil prices are low.
Unlike Branson, many others aren’t buying the idea that lower oil prices will be bad for the renewable energy markets. In fact, many believe oil, electricity and renewables have little in common today. Even renewable electricity doesn't compete directly with oil, suggests Gabriel Phillips, CEO of GP Renewables & Trading LLC. In fact, Phillips claims his biggest problem during a dramatic drop in oil prices is explaining the volatility to his clients.
“When there’s a downturn in the cost of fuel and a downturn in the cost of power, the cost doesn’t go down in a renewable power plant because they don’t use that fuel to make energy anymore,” he says. “I mean, if oil prices keep sliding in certain markets, it might begin to compete with natural gas power plants … but this is highly unlikely.”
If oil prices don’t really affect renewables and clean energy, why is the public so nervous? Because at one time, it did. A glut in low-price petroleum used to be problematic in the 1980s and 1990s, causing economic power to be weakened for oil-producing countries, OPEC to lose its unity and the clean energy industry to take a severe cut. But the energy market has changed exponentially since then. In the 21st century, “diesel and other petroleum-based fuels account for only 5 percent of global power generation today,” according to the International Energy Agency, compared to a full quarter piece of the pie in 1973.
What's Next for Clean Energy Business Owners
While all commodities in the energy space will always be somewhat intertwined, the clean energy economy is strong on its own, especially in developed countries. Analysts predict that emerging markets, such as the Middle East and North Africa, will have more to worry about since electricity is still largely produced by diesel generators and oil-burning power plants. But solar will still be able to stand on its own and compete for the rest of the world.
A recent energy cost analysis by Lazard further backs up oil’s diminishing impact on renewables by finding that the average long-term cost for maintaining large-scale solar energy has fallen by 20 percent in the last year and 80 percent in the last five years; the cost for wind energy has dropped by 15 percent in the last year and 60 percent in the last five.
In short, the dependency is no longer there. Business leaders in clean energy should step forward to ease worries from those inside and outside of their industry. In fact, right now might be the best time to show the world just how strong the clean energy industry is. In a recently published press release, Michael Liebreich, chairman of the advisory board at Bloomberg New Energy Finance, said: “The story should not be how falling oil prices will impact the shift to clean energy, it should be how the shift to clean energy is impacting the oil price.”
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