Crude Economics
Solar Stocks Plunge Alongside Oil Prices

After a downright dismal 2015 for producers, oil prices are finding new lows this year over fears about a Chinese economic slowdown and a global glut of crude. And, as Reuters reports, solar stocks have fallen right along with oil prices over the past two weeks:

The [MAC Global Solar Energy Stock index] has dropped 16 percent so far in January, due in no small part to oil’s 20 percent slide so far this year. Oil briefly fell below $30 a barrel on Tuesday for the first time in 12 years, [O/R] and the solar index tumbled 2.75 percent [. . .]

“They are not substitutes,” Raymond James research associate Angelica Jarvenpaa said of crude oil and solar energy. “However there is probably an impact on market psychology.” Some investment funds, Jarvenpaa said, have sold off their energy holdings altogether as the oil market carnage has intensified and caused financial pain to oil producers across the world. Solar and renewables, as energy stocks, are often dumped along with other energy shares even though solar installations are expected to log a 30 percent increase for 2015 and the cost of solar has come down so much that it remains cost competitive with traditional energy sources in many places.

Renewables don’t directly compete with fossil fuels. If they did, we would have hardly any wind or solar farms. Those green energy sources simply can’t beat their dirtier cousins on price, and so they survive on the grace of heavy government subsidies, not consumer demand. Therefore, the reason why solar stocks have plunged alongside oil prices is not because lower prices help oil beat out renewables in the marketplace.

But just because renewables might be insulated from market forces by government support doesn’t mean falling oil prices can’t still pose a threat. As we’ve noted before, cheap oil can change the political calculus underpinning these subsidies if policymakers are no longer willing to pay what amounts to increasing premiums for renewables.

Subsidizing current generation renewables has never made much sense, but it’s looking downright foolish now as natural gas and oil prices plummet in a world swimming in hydrocarbons. This kind of government support often isn’t sustainable (just look at the mess in which Germany has found itself), but it also carries with it an opportunity cost: The hundreds of millions of dollars spent propping up today’s relatively inefficient solar panels and wind turbines could be better spent on the research and development of technologies that might one day be a cheaper option than fossil fuels. That’s the path towards a greener global energy mix, and the sooner global greens wake up to that reality, the better off the planet will be.

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