21 October 2008

On Alternative Energy, Oil Prices, and the Impending OPEC Summit

The sky is falling for alternative energy.

That's true, at least, if you believe the New York Times. In an article yesterday, Clifford Krauss took a decidedly dour view of the prospects for renewable energy in the near future.

"The central questions facing renewables now," according to Krauss, "are how long credit will be tight and how low oil and natural gas prices will fall. Oil and gas are still relatively expensive by historical standards, but the prices have fallen by half since July."

Indeed, oil tumbled more than 5 percent Tuesday, according to Reuters, "amid worries a global recession will crush fuel demand, limiting the impact of any supply cuts by OPEC."

U.S. oil for November delivery tumbled $3.98 a barrel to $70.27 by 12:33 p.m., after hitting a session high of $75.69. Natural gas has also pushed down by close to half to $6.79 per thousand cubic feet from $13.58 in early July.

OPEC is set to meet on Friday, which has many analysts scrambling to anticipate what they will do. Some analysts close to the situation cite Iran's assertion that "drop in demand could push OPEC to cut output by 2 - 2.5 million barrels per day, while other members have said a smaller cut may be needed."

Energy analyst Gregor MacDonald is "not convinced they need to cut that much."

"Remember," Gregor wrote in his blog yesterday, "this meme of demand destruction is is very much perception related right now. There is not alot of data to support it. US demand numbers revived very quickly in July and August when petrol prices fell. The new demand data showing US is down again actually has alot to do with people in the South simply being unable to obtain petrol, after hurricane Ike."

The forces do seem to be aligning against alternative energy, despite the $17 billion tax credit rider attached the Paulson-Bernanke rescue blanket.

Seemingly, a perfect storm is brewing against alternative energy development: low fuel prices, lack of credit, and the government shelling out money it doesn't have to shysters and speculators who took on too much risk.

But at the end of the day, we're still going to have several problems with which to deal, including a dwindling and more difficult to access (read costly) oil and gas supply, renewable energy portfolio standards in many states, global pressures to deal with greenhouse gas emissions, and continued increases in global demand for energy.

Unlike the collapse in oil prices in the 1980s, when the nascent renewables market evaporated, renewable energy today is a big business. The total investment in the sector increased to $148.4 billion last year, according to a New Energy Finance analyst quoted in the Times.

While this year investment is likely to be lower than last, the upward trend may be hard to stop.

And if you think low oil prices are be back to stay? Think again, says MacDonald.

"Already, these price levels around 70.00 are the set-up to a new price high next year," MacDonald writes. "At 100.00, we can have lots of steady supply without much need to go higher. At 70.00, supply is killed off and then we ramp again. Next time above 150.00."

John Whitehead, a professor in the Department of Economics at Appalachian State University, thinks that it's essential we price nonrenewable energy in a way that accounts for the associated negative externalities. He suggests, as others have, that cap-and-trade or a carbon tax can "keep the demand for renewable energy going strong."

"Since we can't much afford renewable energy subsidies with a big budget deficit," Whitehead writes. "I will go so far as to say that high nonrenewable prices are the only way to reach the point where we significantly shift to renewable energy."

But others argue that cap-and-trade and carbon taxes are market distortions (although the subsidies fossil fuels have been receiving for years may be equally so) and, in the end, will do little to spur the level of economic activity that is needed.

A temporary slip in oil prices, however, that leads to a higher spike may shift the floor yet again.

"Let's make this simple," Gregor writes. "If OPEC cuts big and gets the price back up to 90.00 or 100.00, then the chances of a new price high in oil next year will diminish. But if price, for whatever reason, stays at 70.00 into the middle of Winter, then prepare for 160.00 by next August."

And this time, it may just be game-changing levels in favor of the new green economy.

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