Sniffing Oil: Everyone is Losing their Minds

Sniffing Petrol can cause self-harm…Petrol is for CARS. The best of aboriginal playing cards, at your service!

 

 

People are going nuts.

And its all because of Oil.

Now if you say, oh we’ve heard all this before, Iraq War, Kuwait, Keystone XL pipeline, then well we couldn’t argue with you.  But this most recent oil craziness has come to us through extraordinarily low oil prices, which is impacting entire economies (ahem, Russia), disrupting financial markets, and in some ways having an impact on the investments made in tangential industries like Electric Cars and Renewables, which we cover here at the GreenBull!

What the Hell is Going on?:

This article does a hell of a job explaining, but let me paraphrase.  Back in 2010 you’ll recall things were getting sticky when we began seeing high oil prices – nearly $100 a barrel – and they remained that high because of high demand.  Countries like China (and to some extent the US) and some critical conflicts in oil producing nations (ahem Iraq, Libya, Jasmine Revolutions) created much higher demand, with less capacity on the supply side.  While it did produce some short term gains in oil, countries like China and the US started looking for alternatives, drilling at home, creating new standards for efficiency etc.

At that point, demand started shrinking (or not growing as fast) while supply was rapidly increasing, and by late 2014 the International Energy Agency was seeing a big gap between supply and demand.  As anyone who’s been through college with any modicum of academic rigor knows…this mean that prices go down.  And down they plunged.  OPEC met again recently and…did nothing.  They could have tightened up production and made oil prices go up, but did not do so.  Many people think its because some countries wish to maintain their market share, others think its to strangle nascent energy producers in places like the US and China.  Either way, the price of oil has gone down faster than a wagon filled with lead.

“It seems like an all-out strategy on their part to finish all the weak players in the market who can’t survive at sub-$60 or even sub-$50 oil.”

– Reuters (Link)

Look on the far right - that's what's happening right now.  The green line (supply) is exceeding the amount of Yellow (Demand) and so prices have been falling to keep the economy in equilibrium.  Those huge spikes in oil prices in 2010 - you'll notice its the exact opposite situation.  More people wanted oil than our suppliers had oil to sell, so the prices spiked to $100/barrel.

Look on the far right – that’s what’s happening right now. The green line (supply) is exceeding the amount of Yellow (Demand) and so prices have been falling to keep the economy in equilibrium. Those huge spikes in oil prices in 2010 – you’ll notice its the exact opposite situation. More people wanted oil than our suppliers had oil to sell, so the prices spiked to $100/barrel.

 

Why are Renewable Energy Stocks getting Hammered?:

Now here we are at the end of 2014.  Those huge supplies of oil…and no one to buy them, is great for us, the consumer!  It means that we get cheap gas.  Suppliers like Russia (who’s currency imploded last week) and Venezuela who rely on high prices to sustain high revenue from oil, are on struggle street big time.  It is also why in the last month or so, renewable energy stocks are down in a sell-off that started in November of this year, and why some like First Solar (FSLR) have dropped almost 10%and Sunpower (SPWR) has dropped almost 16% in that time.

Investors are afraid that with oil looking so attractive right now, that no one will be interested in what looks like a much more expensive power source like Wind or Solar Energy.  Falling oil prices are considered a risk to the solar industry in particular.  So many are selling and shorting these stocks, and now there is a big market opportunity for those who would like to buy.

Consider this an opportunity to buy solar energy stocks if you have been looking for an entry point.  This article does an outstanding job laying out a strong recommendation for buying and here is why:

  1. This low price of oil won’t last. When it goes up again, so will the attractiveness of alternative energy. And we all know oil prices will go up again.
  2. Ultimately, alternative energy is still more expensive than oil, so at the moment, the main factor in demand for solar energy is the fact that its clean, environmentally friendly, and renewable.  That market is not one that is shared with oil, so it is not largely impacted by a temporary drop in oil prices.
  3. Lastly, solar and wind are primarily used for electricity generation, and use entirely different infrastructures to generate that energy than oil does.  Because solar is not used for, say, CARS, it is not competing with oil for that market, and clients with established infrastructure will not invest the huge amount more than they save by switching to oil, to also change their infrastructure on what is ultimately being perceived as a temporary drop in oil prices.
  4. At the moment, solar is pretty cheap – its a good buy whether or not oil prices are low considering that in particular FSLR and SPWR both have solid bottom lines.

Understand the reasons behind the panic for the sell-off in Solar, and the flight away from the industry suddenly has context, but isn’t necessarily smart.  Consider using the opportunity to invest in renewables now before they return to their pre-oil-crisis levels 10-15% higher than they are now.

Stocks to Consider:

 

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One thought on “Sniffing Oil: Everyone is Losing their Minds

  1. From a LinkedIn commenter G.B.:
    “Low oil prices are fantastic for the economy, except for oil producing companies, mostly upstream. Realize that oil companies and shale drilling propped up the weak US economy the last four years, but now that the other sectors are improving, low oil prices will stimulate the economy. Buy wind and solar in a year when prices bottom out.”

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