OPEC Unrest, Coal Struggles, and Solar Gains – 1/5/16

Even with unrest in the Middle East led by news of Saudi Arabia executing a prominent Shiite cleric oil prices continue to fall.

Unless the tensions lead to actions that significantly reduce supply by the two major OPEC producers, the friction just adds another obstacle in the way of a group effort to reverse the glut as the two compete for market share. Record highs in inventory and oversupply are being cited as the reason for the muted impact. Bearish expectations for Chinese demand are likely to be the main driving force behind prices until the oversupply wanes a bit. Recent falls in inventories have been attributed to tax avoiding maneuvers so one might question how much more room can be found if supply keeps outstripping demand.

A bigger question is how much influence OPEC will actually have in the future if US domestic production sustains its growth and surprising robustness. Still, an Arab spring situation in a major producer such as Saudi Arabia, which contributes over 10% of total production, would always have a devastating impact on prices. Saudi Arabia will face massive budgeting and financing problems as long as the oil glut continues which may force unpopular budget cuts that create political risks and unrest.

In the power sector, coals significant contribution to emissions has made it a prime target for environmental advocacy groups. Pressure to meet environmental standards combined with decreasing costs of shale gas drilling and clean energy technology have led many to believe that demand for coal will at best stay steady in the near term and at worst see major falls as companies commit to moving away from coal-fired generation. A switch in the majority share of electricity production from coal to natural gas in the next decade is a certainty while clean tech such as solar and wind will eventually see price declines large enough to encourage large scale implementation. Hydropower and nuclear power are not expected to grow as the best hydro sites are already being utilized and nuclear plants face both image and competition issues that make growth unlikely.

In solar energy news, GTM Research has put out a report predicting a  approximate fall of 41% in grid-scale storage balance of systems costs over the next five years. Though the savings will be distributed across the projects’ entire value chain, the largest declines will come from declines in storage inverter costs and  decreased soft costs as the industry builds momentum and influence. The solar industry’s build up of lobbying power and Republican support were key in seeing the Investment Tax Credit extension built into the lifting of the US oil export ban. If it can maintain supporters in both parties and in both houses of Congress during this time of political unrest, the solar industry may see the significant declines in soft costs needed for solar to compete with traditional electricity producers. In Canada, the situation is starkly different. The lack of a ITC equivalent and overall lackluster lobbying for Federal support by Canadian firms has left much of the industry out in the cold. Perhaps the introduction of new PM Justin Trudeau will cause some movement in the North.

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