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Wednesday, February 4, 2009

Is cheap oil bad news?

The NY Times today has caught up to the idea that good news for consumers (low oil prices) is bad news for the renewable energy industry. This is actually a story that’s been building for months.

Consumer are thrilled that oil prices have pulled back some 50% from their summer record highs, putting money in everyone’s pocket. Oil that was once $147/barrel is now hovering around $40, slightly up from $34/barrel in December. Local gasoline price (with high California taxes) went gone from over $4/gallon to less than $1.70/gallon before coming slightly above $2. These falling oil prices have meant falling consumer prices, down 1.0% in October and 1.7% in November — increasing consumer purchasing power.

By the same token, environmentalists have been worried that falling oil prices will lessen national interest in renewable energy and energy efficiency. I think the worries are overblown for several reason, not the least of which is the strong support for EE/RE that’s a certain outcome of the Obama administration.

Business Week attributes the current turmoils of the PV industry to falling oil prices. I’m not sure I follow the argument, given how small a role oil places in US electricity generation. Coal provides half, and together coal, nuclear and natural gas account for 88% of US electricity.

I think the other factors listed by BW are more important, specifically the excess entry of new startups fueled by VC investments (as they did with dot-coms in the 1990s, and disk drive and PC companies in the 1990s). There is also the general decline of capital spending by firms and consumers — both because cash is scarce (so long-term spending is being deferred) and due to difficulty obtaining financing. No cash, no panels, no sales.

While the nature and amount of Federal support for PV is unknown, our new president has already said he’ll spend money to improve the energy efficiency of Federal buildings. Although no public promises have been made yet, some activists predict this will include LED illumination —which would drive the new technology down the learning curve.

Also, the energy/environment “dream team” nominated for the new administration are expected to take steps to reduce CO2 emissions. The #1 target will be those coal-fired power plants, thus increasing the price of electricity more directly than any changes to oil prices.

On the transportation side, falling gasoline prices have cut sales of hybrid vehicles in half. Hybrids are more expensive up front, and payback periods have doubled since last May’s levels. But I think there will be an opening for real economy cars — like those we had in the 1970s after the first two oil shocks — which are both cheap to operate and cheap to buy. Honda is already on this trajectory

I originally thought there wouldn’t be much impact on electric vehicle sales in the near term. EVs penetration is well under 1% — not yet the early adopters in the diffusion of innovations (Everett Moore) sense. These earliest adopters (called “innovators”) want to be the first on their block to own one, and are not motivated by cost-benefit calculations.

However, I’ve since changed my mind. Everyone’s feeling poorer, including the rich who are willing to pay a premium for an EV: their stock portfolios are down, their retirement portfolios are down, their real estate portfolios are down. Like everyone else they are deferring capital expenditures as much as possible.

With or without cheap oil, there will be a shakeout of EV manufacturers. There has already been excess entry (30+ companies thus far) and thus consolidation or shakeout is inevitable. If the Big Three survive, they will add to the competition during a period with high up front costs and limited range. The pressures will be exacerbated by the wariness of individuals and businesses to make capital purchases.

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