Low Oil Prices will Slow Renewable Energy and Impede the Growth of the Green Economy

With oil prices at a 5-year low, renewable energy and the green economy are being hit with some serious headwinds. Low oil prices are not only detrimental to the growth of renewable energy it is also decreases demand for hybrid and electric cars as well as cleantech in general. High oil prices buoy interest in renewables, while low oil prices put downward pressure on the growth of the low carbon economy.

For more than a quarter century we have been exploring the ways in which oil prices are related to renewable energy. A 1989 World Bank study showed how renewable energy technologies are directly impacted by the price of oil. However this study added the caveat that the impact is muted in remote and rural applications (where fossil fuels are less available).

Historically, we have seen how sustained development of new energy sources always rests on the condition of the old ones. Europe did not turn to coal until it had cut down almost all of its trees. A more recent illustration comes from the oil embargo and high oil prices in the 70s. This led to an interest in alternative energy sources and fuel efficient cars. However, that all but collapsed as the price of oil declined in the 80s.

Over the last decade we have seen steady and growing interest in Renewable technologies such as wind and solar. So much so that they have gone from being an obscure pipe dream to representing a serious contributor to the energy mix of many nations.

Lower oil prices may be part of an OPEC conspiracy to make fossil fuels more price competitive at a time when renewable sources of energy are on the rise. Even more importantly, OPEC may want to keep oil prices low to keep the US from increasing its domestic extraction. Low oil prices leverage market forces that delay further investment in renewables.

Although renewables are close to being competitive with fossil fuels, their value decreases as the price of fossil fuels diminish. The net result for investors is that they can expect reduced profitability from alternative energy sources.

Consequently, falling oil prices can be expected to delay some of the investment capital pouring into renewable energy, electric and hybrid cars. Lower oil prices and declining investment could even augment fossil fuel use which would in turn increase emissions and accelerate the pace of global warming.

Governments could do at least four things to help remedy this situation

1. Remove fossil fuel subsidies

2. Tax fossil fuels

3. Increase support for renewables and cleantech

4. Regulate carbon emissions (ie put a cap on emissions)

Market forces and price competition in particular are not the only factors driving the low carbon economy. However, in the absence of government involvement, low oil prices will slow the green economy at a time when we urgently need to see accelerated growth.