Oil and Gas Prices Hit Record Lows – 12/29/15

Record lows in oil and gas prices are destroying the budgets of oil producers, oil-dependent countries, and even renewable energy firms but is the upside for consumers enough to balance out some of the pain?

Increased cash holding during 2014’s decline suggests that, for the economy as a whole, a dip in prices did more harm than good. Now prices are falling again and it seems like Americans might be ready to spend some of what they save at the pump. Although oil and gas industry investment have seen deep cuts of almost half of what was spent last year, a repeat of those cuts is impossible so workers in the industry have already taken the hit as companies prepare their budgets for a prolonged glut. Americans in unrelated sectors have seen the prices low enough, long enough that they might be ready to adjust their spending.

The solar industry is in for rocky times this year as companies must compete with the low prices brought about by the fossil fuel glut, but there is reason for optimism. Between the Paris Climate talks and the extension of the Investment Tax Credit for solar energy, 2016 could still be a good year for the industry as the US is poised for national grid parity – when large-scale solar generate power at a levelised cost of electricity (LCOE) less than or equal to purchasing conventional electricity from the grid – thanks to falling balance of system and financing costs.

With soft costs – including customer acquisition; installation labor; permitting, inspection, and interconnection – and financing making up about 70% of the cost of systems, the industry has a golden opportunity in 2016 to reach grid parity nationally and become a major producer of energy in large, sunny states like California and Texas. Since better storage options making solar more viable, advances in battery technology and projects like Tesla’s Gigafactory reducing storage costs through economies of scale, waste reduction, and optimization of production location, solar may be most economical source of electricity in the US before we reach 2020.

As global oil and gas prices fall to lows not seen since 2004, many countries and firms dependent on oil for revenue are forced to make changes in budgets. For example, Saudi Arabia, despite claims of a price rebound in 2016, is raising domestic fuel prices and rethinking public policies providing cheap food and energy. Lifts of export bans on both Iranian and US crude, resilience of high-cost producers, maximized output by OPEC and other major producers, slowing growth in China, the fact that investment cuts take upwards of a year to really be felt, and overstocked inventories make it all but certain that oil and gas prices will remain low through 2016.

Unfortunately, the massive cuts in investment may ultimately overshoot the goal of reigning in production and result in a supply crunch. The threat of having too much debt during a prolonged glut has made acquisitions a piecemeal affair for now as big mergers have been rare but that could soon change if troubled companies are forced to start selling prime assets for good deals to meet debt obligations in 2016.

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