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Will Lower Oil Prices Affect Renewable Penetration?

“The dramatic fall in oil prices since mid-2014 has raised questions about whether the availability of cheap crude could derail the movement toward lower carbon energy sources, which has been gathering momentum in the last decade and is important to the stabilization of the world’s climate.” – Columbia University  | SIPA Center on Global Energy Policy

Last year I had the pleasure of attending Dr. Geoffrey Heal’s New Developments in Energy Markets class at Columbia Business School (and also had the honor of teaching a section on retail electricity markets).  Dr. Heal, noted for his contributions to economic theory and resource and environmental economics, with co-author Karoline Hallmeyer, recently published a paper for the Columbia University | SIPA Center on Global Energy Policy that addresses the quote above and explores how low oil pricing may affect the penetration of renewable fuels and generation.  The key findings are below and the full study is available here (PDF).

Key Findings:

  • Low oil prices could in principle affect the progress of renewable energy in several ways, by competing with biofuels to displace gasoline in transportation, by making vehicles powered by internal combustion engines more competitive with electric vehicles, and by potentially lowering natural gas prices. Low oil prices have already reduced the appeal of biofuels and of electric vehicles. Biofuels and electric vehicles can still be less costly than their traditional competitors, but the margin is now very fine.
  • In the United States, low gasoline prices make it hard to justify the use of electric vehicles on economic grounds. However, the fact that in the United States most gasoline-powered vehicles return very low gas mileage boosts the competitiveness of EVs. In Europe, EVs should remain competitive with internal combustion engines getting up to 30 miles per gallon with fuel prices of about $6 per gallon and an annual mileage of 15,000. Cost is of course not the only factor affecting the adoption of electric vehicles. Range, charge time, and availability of charging stations are all major issues, so cost parity is no guarantee of market penetration.
  • Because little oil is used to generate electricity, the  primary impact oil prices will have on the competitiveness of different electricity fuels is through its impact on natural gas, which is used to generate 27 percent of electricity in the United States and around 22 percent globally. The impact of low oil prices on natural  gas prices cuts in both directions. In some regions of the world where gas is now very expensive, there will be a drop in gas prices because of the way contracts are written (although there is a general expectation that this aspect of contracts could change). In other regions, the supply of associated gas may fall, and prices may rise, as oil production is cut back. But in yet other regions, resources may be redirected from fracking for oil to fracking for gas, leading to an increase in supply and a drop in prices.
  • While oil is used in only a small fraction of power generation in the United States and globally, a comparison of costs shows that even at current lower levels, oil will not compete with renewable energy  sources in the generation of electric power. For oil-fired power stations to be competitive, oil prices would have to fall to unsustainably low levels—around $15 per  barrel, a price level at which the majority of oil producers would be losing money.

Andy Anderson, LEED AP O+M, CMVP
Managing Director

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