Why should equity markets tank when oil prices do? Beats me. Among many sources of jitters, this shouldn’t be a big one (though The Economistdemurs). When oil prices fall 70+ percent, oil companies and their lenders and investors suffer, so do oil-dependent communities, but oil users (far more numerous) rejoice and respend. The net macroeconomic effect sounds as positive as the middle-class tax cut that it effectively is — the OPEC-monopoly-rent tax that Congress has long seemed determined to pay to the Saudis rather than to the Treasury, finally if accidentally being respent at home.
Surely investors understand — don’t they? — that oil is a commodity. As I explained elsewhere, oil prices go down because they went up before, and they go up because they went down before. Get used to it. Commodities do that; it’s their job. If you don’t like it, don’t buy them. Buy constant-price, and usually cheaper, efficiency and renewables instead, as the national and global market is doing. Then you can avoid loop-the-loop roller-coaster rides and get your energy services cheaper, cleaner, and more reliably.
Those who claimed low oil prices would crash renewables (other than biofuels) were wrong. The reason is simple. Wind and solar power make electricity. Oil makes less than four percent of world and under one percent of U.S. electricity, so oil has almost nothing to do with electricity. Thus in 2015, as oil prices kept skidding, global additions of renewable power set a new record, adding about 121 GW of wind and solar power alone. Renewables’ $329 billion investment was up 4% from 2014, says Bloomberg New Energy Finance (which tracks each transaction), but it added 30 percent more capacity because renewables got much cheaper. Solar power is booming even in the Persian Gulf, where it beats $20 oil.
Natural gas does compete with solar and windpower, and its price tends to move with oil’s, but cheaper gas doesn’t much affect renewable power either. That’s because new wind and solar power often beat even the operating costs of the most efficient gas-fired power plants anyway, even without counting the market value of gas’s price volatility.
Yet as oil prices gyrate, it’s important to understand that underlying trends are shifting too, to oil’s disadvantage. It’s happened before. In the 1850s, whalers—America’s fifth-largest industry—were astounded to run out of customers before they ran out of whales. Over five-sixths of their dominant market (lighting) vanished to competitors—oil and gas both synthesized from coal—in the nine years before Drake struck “rock oil” (petroleum) in Pennsylvania in 1859. Two decades later, Edison’s electric lamp beat whale oil, coal oil, town gas, and John D. Rockefeller’s lighting kerosene. Today in turn, most traditional lighting is being displaced by white LEDs, which each decade get 30x more efficient, 20x brighter, and 10x cheaper. By 2020 they should own about two-thirds of the world’s general lighting market.
More at the link. I meant to post this at the beginning of last week.