What Does Falling Oil Prices Mean for Renewable Energy?

One the most important developments in the field of energy in the current decade is the sharp and sustained improvement in the economic feasibility of the technologies used in renewable energy generation. These technologies have greatly evolved due to their large and rapid deployment in many countries. Some of these renewable energy technologies have become cost competitive with conventional hydrocarbon sources of energy, which caused many countries, including the Gulf Corporation Countries (GCC) countries, to become increasingly interested in renewable energy. But the sharp decline in oil prices since mid-2014 – where oil lost about 50% of its value since last summer – raised concerns about the impact of falling oil prices on the economic feasibility of renewable energy sources. Some believe that this decline in oil prices would delay the the growth of renewable energy worldwide. But in fact, we find that the fall in oil prices did not have a significant impact on renewable energy. The renewable energy sector reached a level of high maturity where oil prices no longer affect its fate. 

When oil prices collapsed in the 1980s, several large renewable energy projects were stopped in a number of countries such as Japan and the United States. This happened even though oil is not considered as a substitute resource in the generation of electric power. However, oil prices affected renewable energy deployment through its effect on the pricing of other fossil fuel sources such as natural gas. As oil prices fell, the demand for hydrocarbon sources of energy rose and the demand for the relatively expensive renewable energy retreated. 

Today, we find that renewable energy technologies have greatly evolved, no longer constituting an expensive alternative to conventional energy sources. For this reason, the recent fall in oil prices did not have a significant effect on investments in renewable energy. Renewable energy technology is continuously and rapidly developing leading to large price reductions. Prices of wind turbines fell by almost a third since 2009. The cost of utility scale solar PV fell by about 50% since 2010, while the cost of rooftop solar panels has declined by 70% since 2008. It is clear that the cost of renewable energy will continue to decline over time. 

Renewable energy production is encouraged in many countries, not only as an alternative source to fossil fuels, where if its prices rises compared to fossil fuels production of renewable energy will decline. Today, countries are investing in renewable energy for environmental reasons, most importantly to prevent global warming. For example, China, which is the largest investor in renewable energy today, refuses to reduce its investments in renewable energy with falling oil prices and with the falling coal prices, which is the main source of electricity generation in China, because the purpose of investment in renewable energy is first to reduce pollution in cities and secondly to diversify energy sources and achieve energy security. Because countries are investing in renewable energy for environmental reasons or to diversify energy sources, oil prices today no longer have a significant effect on investments in renewable energy. 

Looking at the history of oil prices, one can observe that oil prices are in constant fluctuation. These low oil prices are temporary, and even if oil prices stayed at current levels for a few years, oil prices would eventually rise again. Therefore, investment decisions regarding electricity generation should not be based on current oil prices. Investing in renewable energy sources are investments for power generation in the long term since the lifespan of solar and wind technologies is more than 25 years. 

The GCC countries can benefit from oil price fluctuations through investing in renewable energy. When oil prices rise in international markets, the opportunity cost of domestic energy consumption becomes very high. This is because domestic energy prices are subsidized and do not change with changes in international prices. Therefore if a country invests in renewable energy it can export more of its oil abroad and use the profits from exports to invest in the economy and to diversify the sources of income. 

Investing in renewable energy is very important for the GCC countries due to the high non-sustainable energy consumption. If consumption continued to grow at current levels the GCC countries will be forced to sacrifice their exports – which is the main source of income for governments in the GCC countries – to meet domestic consumption. Saudi Arabia, for example, now consumes about a quarter of its oil production domestically, compared with only 3 percent in the 1970s. Hence, the GCC states must consider reforming their economies and diversifying away from oil and gas resources. The region is considered one of the best areas in the world in terms of solar irradiance. Therefore the GCC countries are capable of producing large amounts of solar energy, and becoming a leader in solar energy production. The GCC region can also become an exporter of solar energy to neighboring countries.

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