Making sense of dollars and cents 

wind turbines

Global oil prices have been dropping dramatically over the past 18 months. I recently wrote about Saudi Arabia’s response to dropping oil prices, but what’s happening as a result in the U.S.?

U.S. oil prices are 70% lower than they were in mid-2014, and renewable energy experts are worried that lower oil prices will make it harder for renewables to compete with fossil fuels on price. And, if they can’t compete on price, will that hamper investment in renewals overall?

Maybe not. Wind installations grew by 65% from 2014 to 2015, and solar PV installations grew by 13% over the same time period – both of which outpaced coal and natural gas installations. And, the growth is expected to continue – wind energy capacity is projected to jump 16% in 2016, and solar is expected to rise 28%. Globally, investment in renewables hit record levels in 2015 at $329 billion. And, if the formation of the Breakthrough Energy Coalition (a collective of the world’s billionaires committed to investing in clean energy) is any indicator, investment growth in renewables is likely to continue. (Side note: I know oil doesn’t directly compete with electricity on any major scale, but low oil prices can contribute to lower natural gas prices as well. Low natural gas prices make it harder for renewable electricity generation to achieve “grid parity” – where renewables are cost-competitive with conventional fossil fuels.)

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Source: U.S. Energy Information Administration

The bottom line? Low oil prices seem like a threat, but investment in renewables continues. 

What does that tell me? Price isn’t the only driving factor when it comes to energy – we are committed to a low carbon future. According to Lisa Jacobson of the Business Council for Sustainable Energy,

“It does not matter that oil prices are low. We’re still deploying more efficiency, renewable energy and natural gas. We are on a path that’s not going to deviate.”

The Paris climate change summit made it abundantly clear that we are committed to a clean energy future. Collectively, developed countries pledged $19 billion to help developing countries adapt to the threats of climate change. And, by the time the conference arrived, commitments to take specific climate actions had been made by 2,250 cities, 150 regions, 2,025 companies, 424 investors, and 235 NGOs.

But, there is one area where this insensitivity to oil prices doesn’t hold true – transportation. EIA data indicates gasoline prices are 22% lower today compared with this week in 2015 – when they were 34.5% lower than the same week in 2014. What has that meant for alternatively-fueled vehicles? Hybrid vehicle sales dropped 16% in 2015, and plug-in hybrids saw sales decrease by 24%. Sales of purely battery-powered cars (like the Tesla) did increase last year by 16%, but these cars are more of a luxury purchase – not indicative of an economy-wide trend.

So, what is it that causes transportation to be more sensitive to low oil prices? If I had to venture a guess, I would say it’s likely due in part to the fact that oil is a direct input in most cars, so its price has a direct impact on people’s wallets. Transportation costs are also a significant portion of monthly expenses; transportation expenses cost the average household $9,073 per year – or 13.57% of the average household’s annual income. Of those expenses, 27.2% are related to gasoline and motor oil. When a such a noticeable portion of income is going toward transportation, people are bound to be more price sensitive about it.

What I want to know is what will motivate people to switch to alternatively-fueled or higher efficiency cars if oil prices remain low? Will less expensive electric vehicles prompt the switch? Just last month, Chevy unveiled the Bolt – the first all-electric vehicle to have a range of over 200 miles and an effective price tag of under $30,000 (after the federal tax credit). Maybe having a truly affordable EV with a solid mileage range will transform the market? Do we need more tax incentives? Better infrastructure for alternative fuels and EV charging stations?

Honestly, it might necessitate greater economic recovery/growth. Real median household income is still 7.2% lower than its peak in 1999; EVs are typically seen as a luxury item, and spending more money to be environmentally friendly probably goes out the door pretty quickly when money is tight. I know economic growth is no small thing to ask, but investing in renewables should help deliver on that — remember, the Union of Concerned Scientists estimates that transitioning to 25% renewable energy by 2025 will provide $300 billion in economic benefits to the U.S. economy. So, maybe continuing to invest in clean energy to create a low-carbon future will indirectly enable U.S. consumers to pay for greener vehicles as well. It’s the circle of sustainability :).

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