Cleantech's Correlation to Oil Prices

Are Oil Prices Still the Main Energy Indicator?

Written by Brian Hicks
Posted March 18, 2008

In the early days of what is now called the "cleantech industry," it was assumed that the price of oil would be the main indicator of the value of new technologies. In other words, as the price of oil fluctuated up and down, so would the perceived value of clean energy companies.

And so it went for the next few years. Whenever oil prices spiked, the stock prices of cleantech companies followed soon after.

It makes sense--at least initially. Oil was one of the cheapest energy resources on the planet, dwarfed by the cost of renewable energy technologies at the time.

So when oil prices went up, newer energy sources became all the more competitive. Simple.

The mistake, however, was using "energy" as a blanket category.

Now, with a more developed cleantech sector that is highly fragmented, is oil still the main indicator of the value of clean energy?

Oil Prices and Clean Energy

I'll take the copout and say to some extent.

This is because oil, as ubiquitous as it is, isn't a synonym for energy. For example, oil gets us to work, but it doesn't keep the lights on in the building.

By that metric, the price of oil can be used as a barometer for the value of biofuels, but not for the value of electricity-producing technologies like solar and geothermal.

Yet that doesn't seem to be the case either, because we've seen a meteoric rise in oil prices lately--68.5% just in 2007--but biofuel stocks haven't basked in the same glory. In fact, they've recently been in a downtrend.

So where does the notion that oil's price indicates the viability of other energy industries stem from?

Frankly, from a simpler time in the world's energy history. A time when the price of oil was even used to determine the economic viability of coal-fired power plants. A time when the dollar was still strong. A time free of the mortgage and credit crisis. And a time when cleantech was still nascent.

A Maturing Cleantech Industry

Before world markets entered this time of disarray, oil prices rose for a reason--like supply constraints or geopolitical tensions. Now we see oil rising for reasons like a weak dollar.

This simple observation lets us know that oil's price is currently experiencing a disconnect with its primary fundamentals. Those who sell oil have to charge a higher price to offset the ongoing devaluation of our domestic currency.

But, more importantly, many cleantech sectors have now graduated from nascence to adolescence. And as adolescents, they have indicators of their own, beyond the price of oil.

Solar's viability, for example, is contingent upon cost per watt, which depends on silicon prices and the technologies that are used to produce modules. Wind's feasibility, meanwhile, relies on the terrain and wind speeds of a proposed site.

What this all boils down to is the maturation of a new energy industry--one that is not subject to the arbitrary whims of floor traders.

We now have a renewables industry ready to take the training wheels off. Biofuels, wind power and solar each surpassed $20 billion in revenue last year. And each will at least double that total again in the next decade.

Plus, we're now seeing certain types of renewable energy capable of providing base-load power in some areas through major achievements in battery and advanced electronic technologies.

But despite the growing maturity of the cleantech industry, the perceived value of oil will still be used--to some extent--as a broad economic indicator for the entire energy sector. This can be attributed to oil's long-time reign as energy king.

Those in the know, however, realize that oil's days are numbered. Because no matter how many times oil breaks intraday price trading records, its prices, as well as its overall production, will peak eventually.

Ultimately, it will be oil's availability, not its price, that will have bearing on the deployment of clean technologies.

In the meantime, the value of renewables will rise for a litany of other reasons besides the price of oil.  And those that have the insight to invest in cleantech will profit handsomely.

Until next time,

nick hodge