Monthly Archives: January 2016

Markets Follow Oil Prices Downward – 1/16/16

People are panicking as stock markets across the world tumble on the heels of oil prices. Investors are fearing that China’s slowdown and an energy industry facing unprofitable oil prices will bring about another wave of recessions as banks are forced to absorb losses on loans made to oil and gas companies. Fortunately, there are some facts to soothe worried minds. US banks are holding significantly more capital specifically to lessen their exposure to bad debts, which were a driving force behind the 2008 financial crisis when so many banks overburdened with toxic assets were forced into bankruptcy. So long as US government and American people are still ready to pile on regulatory burdens in retribution for the old crisis, there are few banks that would risk rocking the boat now that another could be close.

The major issue facing markets for the next few years will be China. After borrowing immense amounts to fund growth, the country is full of factories and luxury apartments that no one can turn a profit on. Overcapacity in real estate and industrial goods will need to be curtailed if the country is to move into more sustainable growth areas but the government is understandably hesitant to take the necessary steps with so many citizens set to lose jobs in the transition. Still, the Chinese government will not allow a hard landing while they have reserves and other options to fall back on. The government is nothing if not careful to preserve the economic security needed keep its legitimacy.

The psychological and economical threshold of $30 is breached again as Iran begins to increase output in an oversupplied market so how are the shale-oil seekers doing? Well, as oil is falls further below the $30 a barrel point, more and more high-cost producers in the US are defaulting. Companies that made the loans continue to set aside billions to cover the losses that set to emerge this year as they fear that even liquidating assets acquired from bankruptcy settlements will not be enough to cover bad loans. The goal now will now be to set suitably tough standards for the troubled oil producers to keep clients stay afloat while minimizing risks to the bottom line.

With as many as 1/3 of US oil and gas producers set to veer into bankruptcy by 2017 if prices do not rebound this year, one might think the worst is yet to come for the economy. However, with so much time to hedge risks and offload the worst of the holdings losses, profits lost due to bad energy loans should manageable though substantial for big names in finance. As a result, we are unlikely to see the bailout-heavy environment that popped up after the housing market saw collapsing prices.

As sanctions against Iran are lifted, it will seek to increase its oil sales only adding to the problems faced by already pressured US and international producers. Whether or not current prices already reflect the return of Iranian output is debatable since a lot of uncertainty surrounds the country’s strategy as it prepares to wade into an already oversupplied market. Moves to regain market share through long-term contracts are a probable first step even with oil prices closing in on a bottom. After losing ground in Eurasia to Russia and Saudi Arabia when the sanctions first came into place, Iran will come back to compete for its old portion of market share wherever it can. Remaining sanctions restricting dollar transactions and banking will still be a hurdle to US involvement in increased Iranian oil output.

Energy Sector Risk and Loss – 1/15/16

The prolonged slump in oil prices is resulting in increasingly painful losses for the energy sector of most countries as energy-based junk bonds face risk premiums hit 3-year highs. As investors seek to offload these riskier assets and debt markets tighten up, fewer companies will be able to raise the capital needed to survive the low commodity prices and stave off bankruptcy.

A recession in the US is unlikely even with the slowdown in China and crashing commodity prices. Although US commodity companies and trade have taken hits in recent times as evidenced by large job losses in durable-goods makers, miners, and fossil fuel based energy companies, the US is much better prepared to deal with low commodity prices and a weak energy sector. The reason for this is that the US is much less dependent on industry and international trade. It is diversified enough in its resources and job markets that companies owe much less of their incomes to foreign sources. With over 100 million people in the service industry and most new jobs coming from domestically focused industries like education, health, and business services, the US is more likely to benefit from lower prices and the return of capital from commodity dependent emerging-markets. Even in energy, the US has its bets hedged with booms in both shale-oil and renewables. Renewables surprised many in 2015 by attracting billions in investment and creating hundreds of thousands of jobs in spite of low prices of fossil fuel competitors while the shale-oil boom will regain momentum as soon as 2017 if oil prices recover as predicted.

As a country focusing more on capital and technology intensive projects, the US is better insulated from downturns in commodity prices than most. Countries like Russia and Saudi Arabia may have benefited more from high oil prices but now we are seeing just how devastating their reliance on their respective energy sectors can be.

Russian budget headaches are set to turn into migraines if declines in oil prices reach the $20 some analysts predict. Working from a budget originally based on oil averaging at $50 a barrel for 2016 is looking less and less feasible, and with oil and natural gas revenue accounting for half of total government income, the government has no choice but to cut spending and burn through reserves. The cuts will exclude military and social services as the government continues to flex its military muscle with a bombing campaign in Syria.

Meanwhile, nations like Australia and Japan that relied heavily on China’s continued growth to boost their own economies are finding a major customer’s problems are quickly becoming theirs as well. After years of propping up growth using infrastructure projects and heavy interventionism, the Chinese government struggling to maintain industries riddled with inefficiencies stemming from overcapacity and state mandates. Until China regains its footing, the nations that provided the raw materials for the Chinese ascension will have to find new customers.

If Saudi Arabia is set to experience a bumpy 2016, then what about the next 5 years? The next decade? The country sits on one of the largest and cheapest to access reserves in the world, reserves that have made it a wealthy, influential nation by their being invaluable to the world’s oil driven economies. But what happens when those reserves start to lose the value, not just because a fight for market share happened to coincide with falling demand, but because a major consumer like the US has invented ways to reduce demand permanently to cut costs or reduce emissions or avoid dependence on foreign oil. Fuel efficiency standards are already being pushed heavily as environmental concerns are being taken more seriously by all nations. Autonomous and electric cars are set to roll out from major auto companies like Ford. That even China accepted the necessity of climate talks and air pollution reduction should say something about the mood.

So what will Saudi Arabia do? Or rather what is it doing?

The country has long been hedging its bets against the eventual fall of oil. Its leaders have built infrastructure using oil revenues in hopes that the cities it can build now will help it adjust when oil stops being the golden crutch that so many countries rely on. The IPO of Saudi Arabian Oil Co. may just be another move to hedge against hard fall as it would give the country a chance to capitalize on the reserves while they are still worth trillions. Any oil left in the ground when the oil age ends will be worth only a fraction of today’s value. By letting other investors take a stake in the company, the Saudi government can free up capital to invest in more sustainable industries. Besides oil, the country is also abundant in sunlight and the country is already set to make large investments in solar energy as costs of solar systems are fall dramatically… so long as it does not threaten the primary market for Saudi oil – transportation fuel.

Oil Supply and Demand Mismatch – 1/14/16

Possible impacts of the lift on crude oil exports: an increase the market for crude pumped out of US shale deposits and make oil trading more efficient by bringing the reference point of the US (WTI) in line with the Brent benchmark for oil. With the lifting of the ban, shale oil supply is set to make a big comeback when prices rebound and the strongest companies buy up the assets of competitors unable to survive the worst of the price collapse. With the best assets free of debt after bankruptcy and sale, shale oil is likely to start flowing at higher rates than ever. And once US oil finds its place in the market at large and the benchmarks adjust to reflect open trade, the WTI price should rise as lighter shale oil can reach foreign refineries better suited to it than the American ones equipped for heavier mixes.

With oil-trading at 12-year lows, it might be surprising for energy company shares to do well. For the most part, the declines in share prices have been across the board for oil and gas companies except for a few which investors still have confidence in thanks to their relative strength in a time of uncertainty. Many low-cost producer companies like Diamondback Energy Inc. are bringing in hundreds of millions in capital from stock offerings as they pay down debt in preparation for a rough year of low prices. Thanks to low costs and rich wells, companies in the Permian Basin drilling region are poised to ride out the storm in relative comfort. Not to say they won’t be facing the same massive budget cuts as everyone else. Budgets of US producers are set to get slashed by about 50% from 2014 levels in the wake of oil prices falling to a fraction of what they were at that time.

Global demand expectations are pessimistic as market sentiment turns against China and no other country stands out as a possible replacement. In the coming years, India may be the new driver of global growth as a breakthrough has been a long time coming for the nation that matched China in size but not progress. If the country’s leadership can weed out some of the corruption and bureaucracy, then the increased demand may be forthcoming though unlikely to happen so soon as to make up for China slipping.

Europe, America, and the Middle East are unlikely to pick up the slack in demand. Europe is facing down its own set of issues as waves of migrants and the eurozone debt showdown with Greece threaten open border travel, while increased fuel-efficiency standards in both Europe and the US limit the potential upside of cheap gasoline and diesel. Meanwhile, lost oil revenue is forcing governments in the Middle East to raise prices and eliminate subsidies on fuel making increased demand from the region very unlikely.

A prolonged glut threatens to harm some countries much more than others. With domestic issues and few fiscal buffers available, the nations that would suffer the most are likely to be the “fragile five” – Algeria, Iraq, Libya, Nigeria, and Venezuela – as they have been called by some analysts. The Gulf states are going to see unrest as well since they will need to make large cuts to domestic spending that includes subsidies on food and fuel. Saudi Arabia in particular houses a population critical of the government’s expensive and unpopular inventions in Yemen and Syria. Iran and Russia are also going to be hurt by low prices but are better equipped to handle financial issues and domestic unrest as opposed to Venezuela. Venezuela expects continued triple digit inflation and the Opposition party, after successfully taking control of the legislature, prepares itself to lock horns with the President.

In renewable energy news, the US Energy Information Administration (EIA) released its short-term energy outlook earlier this week. The report predicts significant changes in the mix of resources used to generate electricity in the US as older coal plants are decommissioned in response to the low costs of natural gas competition with nearly 5% of the current capacity going offline in 2015. A greater percentage is expected to be replaced in the coming years as the Clean Power Plan policies favoring natural gas and renewables come into effect.

The EIA expects total renewables used in electric power generation to increase by 9.5% in 2016. Projections also show solar power to increase significantly in usage breaking past 1% of total supply by 2017.

With the investment tax credits attached to the bill lifting the oil export ban, solar and wind projects can breath a sigh of relief. The tax credit for wind will apply an additional five years retroactively to a lapsed 2014 incentive while the solar credit will add five years to a solar tax credit due to expire at the end of 2016. Renewables have managed to do well in the last year in spite of low fossil fuel costs and stagnant European investment thanks to increased demand from China and the US so the legislative victory adds to optimism about future growth. Clean energy getting cheaper is making many hopeful that investment will reach an explosive turning point before 2020.

One explanation for how well renewables are doing is that people are losing faith in fossil fuel based companies to deliver in the long-term. Low oil prices have put many oil companies on the defensive as projects are delayed or cancelled amid budget cuts while the low prices haven’t hurt renewable investment nearly as much as expected. Thanks to improving cost-competitiveness and increasingly stringent emissions rules, renewables seem like a safer place to put money in the long-term. Strong demand from emerging markets is likely to continue as renewables tend to be more competitive in areas with weak infrastructure and the need to reduce air pollution.

Fossil Fuels Struggle with Low Demand – 1/13/16

Oil is only one of the fossil fuels in a prolonged price slump. The slowdown of China’s economy has taken a heavy toll on coal as imports to country have plunged in the face of domestic oversupply and attempts to reduce dangerous levels of air pollution. As the Chinese government pushes companies to get their electricity from renewable energy sources, coal imports will take continue falling even as the government suspends the approval of new domestic mines and China stockpiles other raw materials also seeing price collapses.

China continues to be a source of disappointment for those expecting it to provide the much needed increase in oil demand. The government recently announced that it would not be adjusting local diesel and gasoline prices to reflect crude oil prices at less than $40 a barrel. Given the difficulty Chinese energy companies would have operating at lower prices and the fears of increased pollution, the move makes sense domestically even if it effectively caps demand in one of the major consumer nations. In addition, Chinese refineries – both state-owned and teapot – are facing the same overcapacity problems as the rest of the economy as they continue pumping to the point that China has become a net exporter of oil products. The net result of China’s soaking up crude only to push out refined products only exacerbates the weak demand issue as regional markets face bulging stockpiles. Such imports of crude create the illusion of demand where there is only overcapacity and export quota.

In the Middle East, sanctions against Iran are expected to be lifted this week with the country adding half a million barrels a day of exports within the following week. If the market has not already adjusted the price of oil in expectation, then the price is likely to be beaten down again. With gasoline demand declining in the US as Winter encourages people to stay at home, the additional barrels will only be adding problems to an already vastly oversupplied market.

Expectations and Assumption in China – 1/12/16

The slowdown in China and the collapse in oil prices are likely to cause recessions across most emerging markets having a profound effect on the global economy. So why did so few see the problem coming and fewer act to hedge against what in hindsight was an obvious risk? Why were expectations for the world’s most populous nations so far removed from reality?

The housing crisis in the US was an asset bubble situation created by the assumption that national home prices could only ever go up and perpetuated by loose lending standards that allowed NINJA loans (no income, job, or assets) to flood the market to feed the newest derivative craze of mortgage backed securities. These securities were rated almost risk-free by the credit rating agencies before people began to realize just how illiquid and risky the securities could be if many people default on mortgages in a short time. As a result, most financial managers and bankers found themselves holding a lot of assets that no one wanted while home prices, along with household wealth for regular home owners, crashed across the nation.

The government stepped at that point. It bought up the “bad” assets, bailed out a bunch of the “bad” companies. Problem solved… ? Almost a decade later, the mortgage backed securities regained value and all the companies seem to be doing well; however, the root of the problem remains.

Lots of people making terrible assumptions.

China was never going to maintain exponential growth. No tangible resource can be increased exponentially when it depends on finite resources and there is no logical reason to assume that China would be any different than the other countries that seemed set to eclipse all others only to settle down after a spurt. And yet, people trusted to know this basic truth didn’t seem to see the slowdown coming. Maybe China’s growth lasted just long enough for them to forget, or they thought they could still make their money before the time came. Regardless, the game is up.

The investors with expectations of a Chinese “rise to power” are now set to be sorely disappointed. The Chinese government is scrambling force the economy to meet growth targets and contain the damage being done to the domestic currency and financial markets. As a result, countries that relied heavily on Chinese consumption of commodities are suffering. US exports are set to fall as Chinese trading partners who enjoyed booms during high consumption times are facing recessions as overcapacity in China is finally reigned in.

Economists have long turned their noses up at data provided by the Chinese state since they know it is more fantasy than fact but when those numbers last so long and look so good, the assumption that the trends will last forever is an attractive one to investors, especially if coupled with the assumption that some other sucker will be the last one holding the bag when the crash does come.

With the collapse in expectations for China, comes the collapse in oil prices. After years of $100+ per barrel prices driven by rising Chinese demand and faith in an OPEC defense of prices, the price of oil is hovering around $30 a barrel with some analysts believing it could go as low as $20 before the year is through.

The assumption that demand increases from China and supply reductions from OPEC would keep oil prices high will cost many investors and countries dearly. It fueled a boom in the US energy industry between 2009 and 2014 as projections could reasonably be based on ranges of $80 to $100 a barrel which made many assets (land, oil rigs, etc.) look very attractive and many projects look like good uses of massive amounts of debt. Companies benefiting from the boom by providing support services and complimentary goods only found out how exposed they were after the bubble burst.

The lesson seems to be that one should always keep a realistic view on global trends as globalization becomes more important to all industries but a better one might be this: get cautious, not complacent, when an improbably good trend seems to be going on indefinitely. And look hard at assumptions about sustainability.

Oil Expectations Go Low – 1/11/16

Morgan Stanley, Goldman Sachs, and Citigroup recently put out expectations for the price of oil to soon reach the $20 range as China growth slows, the dollar appreciates, and drillers continue pumping through the glut. It appears that market sentiment has well and truly turned against the possibility of a quick rebound. So now the question on everyone’s mind is, when will the losses finally collapse enough producers to put supply in line with slumping demand? Better prepared companies are locked into prices above $50 a barrel this year thanks to hedges. Managers at those companies have every incentive to keep the oil flowing as their most efficient wells are still making decent returns while investors are still willing to put their faith in the energy companies that seem ready to ride out the brewing storm of bankruptcies. All of this happening after the companies took on large debt burdens to take advantage of the time when triple digit prices seemed to go on forever and oil expectations were high.

Even if a large portion of US shale companies go bankrupt when capital markets turtle up and options run out, the assets will just be sold cheap and free of debt to private-equity firms. And once the slate is wiped clean, the rigs will be ready to start up again with the new owners not worrying about debt loads weighing down profits. After the bloodbath, after the bondholders and other stakeholders accept their fates, its hard to say if the hit to production will have a significant, lasting effect since so many are ready to buy up assets and see the benefits when prices rebound.

Cuts in investment made by more traditional producers may be a more permanent feature as the technology that makes high-cost production like shale-oil fracking possible is going to get cheaper and better long before it goes away. The US export ban is gone. As result, the US is ready to be a net exporter of gas as horizontal drilling and fracking made it possible to access previously untapped energy reserves.

Saudi Arabia has made it clear that it will not reign in production even as US producers show significant resilience and a war in Yemen threatens to eat into a government budget counting on 70% of government revenue coming from energy exports. Massive reserves and minimal debt will keep the country from complete collapse but it will still need face oil prices projected to reach $20 a barrel. If oil prices remain low for a protracted period during Saudi attempts to exert influence in Yemen, the government might find itself burning through cash and debt at an unsustainable rate even as it cuts expenditures and attempts to tap international debt markets.

Still, the country is in better shape than Russia and Venezuela. Both countries would need to see a return to $100 barrels to balance budgets. Depending on how long the price collapse lasts, the two countries, and many others, will face short falls and internal unrest that would have been unthinkable a year ago.

Oil Market Mismatch Between Supply and Demand – 1/10/16

With a possible IPO of Saudi Aramco in the works, headlines are trumpeting the magnitude of the company’s value to the oil market. Valuations estimate assets including trillions of dollars worth of oil reserves – even in a time when prices are at decade lows and expected to go lower – would put the company’s value higher than Apple or Exxon or any two others combined… without accounting for risk. The reality of the situation is much less exciting. Like Iran and Venezuela, Saudi Arabia nationalized the foreign-owned oil production assets in the 1970’s as prices were reaching highs. The risk of nationalization without compensation will, as it should, make investors hesitant to buy into any stock the company might put out since the end result would be much the same as a default where there is no possible recourse. The main difference between the two situations being that the government is more likely to cut out investors just as prices and profits are rising. In the face of such a risk, a significant discount will likely be worked in.

Oil prices continue to fall as the usual remedies for mismatched supply and demand are no where in sight.

On the supply side: no one is willing to cut production and the dollar is set to strengthen.

OPEC has been faced with a shrinking market share as high prices made economical the high-cost production methods such as fracking, tar sand extraction, and ultra-deep water rigs. The cartel, which produces over 40% of the world supply, has reduced output in the past to send prices upward but currently refuses to move away from current levels. Why? Because market share is still an issue.

The shale-oil boom has defied expectations by OPEC that high prices would strangle the fledgling industry, and it appears to be here to stay as improved efficiency keeps costs falling and financing proves surprisingly forthcoming. And with the lifting of sanctions against Iran not far off, the country is keen to increase production as much as possible even at the expense of fellow-OPEC members. Besides being geopolitical rivals, Iran and Saudi Arabia will be squaring off with new fervor in the global oil markets. Meanwhile, Russia continues to pump for revenue maximization pointing out that it has no interest in OPEC’s attempts to kill off US production through price manipulation. For their part, the high-cost producers in the US are holding on for dear life as each tries to be one of the lucky survivors once the rebound hits and they get a chance to take up more market share from whoever cuts production first.

Oil is leveraged heavily on the dollar, and as the dollar strengthens, oil prices fall. The dollar has finally finished struggling against other currencies that has characterized it since the financial crisis. Now that the US economy appears to be gaining some momentum while others are losing steam, the dollar may drive the price of oil down as low as $20 a barrel. Diversification seems to have saved the US from the slump that many will face now that China is beginning to slow its consumption of foreign commodities. Countries reliant on oil for rosy economic numbers such as Russia, Brazil, and Canada are seeing large devaluations in their currencies. In Europe, overall anemic growth, the Greece-Eurozone issue, and the migrant crisis have made for a sour mood on the Euro.  China is also likely to see a weakening yuan as the falls on pessimistic expectations for the countries economic future.

On the demand side: China’s growth slowdown and pushes for greater fuel efficiency make for bleak short-term and long-term demand expectations.

For years, China has been the driver of global growth as the Communist party appeared to deftly handle the economy. Many even claimed the country would become the new dominant force in the global economy. Nowadays, a very different tune is being sung. Between wild stock market swings, dodgy currency manipulation, stalled reforms of debt-burdened state companies, massive capital outflows, and a massive overcapacity problem, the reputation of the central government has taken a serious pounding. Ghost towns created by a speculative housing sector now stand as monuments to just how out-of-control the country’s drive to meet “growth” targets had gotten. Now that China is facing the reality that no economy can grow at 7% forever, all commodities it previously gorged itself on, from iron to oil, are seeing prices plummet much to the anguish of major trade partners in Asia and Australia.

With oil prices set to rebound sometime in late 2016 due to producers restricting their drilling, the panic surrounding oil is likely to be a short-term issue, but what about the long game? What will happen to oil prices as technological, environmental, and geopolitical forecasts begin to become reality? According to the EIA, about 70% of all oil used in the US goes to transportation and, with emissions and US dependence on foreign oil staying major concerns, many are working to reduce demand through autonomous and/or electricity-powered vehicles.

The Paris Climate Talks and the acceptance of the climate issue by all major countries suggest combined are turning reducing oil consumption into a major economic factor and continued unrest in the Middle East makes it national security issue. So it is no surprise that the Obama administration is beginning to put its money where its mouth is by diverting a few billion towards the autonomous vehicle industry. While Google’s efforts have been widely publicized, more interesting is the recent involvement of traditional firms in the industry. Ford is reportedly working with Google by providing the hardware to surround Google’s software systems. With millions of self-driving cars set to be on the road by 2020, the potential impact on oil could be huge if the reduction in idling traffic alone matches up with predictions.

Long years of waiting for an economically feasible electric car may soon be over as major players in the auto industry like Nissan take advantage of Tesla’s advances to build their own electric-only models. Vastly improved battery and charging technologies have made industry giants much more open to electric models. And, as the giants become more open, so too become the regulators who provide the necessary regulation and infrastructure. Given the overly optimistic predictions of the past, a conservative estimate of millions, if not tens of millions, of electric cars on the road by 2025 seems fair. And with those millions of cars that run on electricity from coal, gas, or renewable power plants, one can reasonably expect a significant drop in demand for oil for the world’s top oil consumer.

Given the way technology is going, the oil market is going to reflect a declining demand for a very long time after 2020. At that point, the next oil glut may be the one that lasts forever.

Oil and Gas Firms Struggle Under Low Prices – 1/8/16

With the glut still growing, oil and gas related companies face tough times and no-win situations. For prices to stabilize production must drop but the companies that reign in output first are painting bull’s eyes on their backs as investors look for the companies that will buckle first under debts taken in more prosperous times. The depression in prices may be prolonged simply because the companies have no incentive to cut back and appear weak when they still have the option of holding on to the hope that the market will recover. However, with prices falling below $30 a barrel the time of reckoning may be upon the companies soon.

Fears of a slowdown in China continue to depress oil and gas prices. With people betting against the yuan, doubting the Chinese governments ability to handle the markets, and fearing that global growth would be dragged down by the slowdown of the world’s 2nd largest economy. Routs in the Chinese stock market only slowed by automatic trading cutoffs from a circuit-breaker rule have continued unabated leading to pessimism about the future of the nation. With supply swamping demand, it may be up to the OPEC countries to make a change either by agreeing to reduce production or collapsing under the weight of budget deficits brought on by lost oil revenues.

OPEC for its part in the crisis has essentially abandoned output limits so far. As major oil producers burn through reserves, austerity measures might soon be the only option for those countries that had for so long relied on oil to fund government spending and social programs. Saudi Arabia, the biggest producer of OPEC players, has seen a flurry of activity in recent times as it competes for market share with shale-oil in the US and Russian oil in Europe, suggests an IPO for the state owned oil company Saudi Aramco, and comes into conflict with Iran with which it will soon be competing if sanctions on the oil producer are lifted as part of an upcoming nuclear deal.

Shale and Solar Short-Term Prospects Like Night and Day – 1/6/16

Shale-drilling investors may have fled in droves as the oil rout deepened but increased efficiency and surprisingly robust funding has allowed top performers to maintain drilling operations. US shale oil has been able to resist low prices more than OPEC expected, and Pioneer Natural Resources Co. managed higher than expected returns on West Texas wells and a share sale will keep the company funded through the worst of the rout.

That said many companies are planning for oil prices to remain at levels closer to $60 a barrel in the long-term. With the days of $100 a barrel apparently gone, planned investments have dropped off sharply. While it might still make economic sense to keep already active rigs running to cover interest payments and sunk costs, most companies took on levels of debt that could never be sustained on current price expectations; those companies’ best assets are likely to be sold off in the coming year to meet loan obligations if prices remain depressed through the year. Financing options are running out quickly as oil prices hover around $30 a barrel. Who exactly will have the cash on hand to take advantage of the buyers market in oil and gas M&A remains to be seen as debt markets tighten up.

Solar energy is seeing changes just as significant as those in oil and gas this year. Since the gluts in the fossil fuels only increase the difficulty of reaching cost competitiveness, solar is fortunate to see projected costs falling rapidly enough that a slight rebound in the commodity prices to $50 a barrel would put solar well below cost parity with even newer natural-gas power plants. If balance-of-system costs (customer acquistion, installation, etc.) and energy storage prices fall as projected fall as projected, solar energy is likely to be the most economical choice for energy production by 2025. Wind and natural gas will complement solar and may be essential to widespread adoption as they balance out supply and begin biting into coal’s share of electricity production. The advance of renewables will speed along in the next five years so long as the industry maintains the support in government needed to update infrastructure to match a more variable supply.

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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