Monthly Archives: January 2016

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.

Oil and Gas Glut Continues – 12/25/15

As the oil and gas glut continues, commodity-linked companies that offered dividends to investors seeking consistent income must choose whether to cut back or risk lower cash reserves in a persistent rout. With stock prices in sharp decline and large debt burdens throughout the industry, dividend cuts would allow the companies to preserve capital in a time when bankruptcy is a clear danger but might also scare off investors in a time when their money is needed most. Unfortunately for the companies, pushes for increased fuel efficiency, pessimistic markets, and weak OPEC influence on prices suggest the oil and gas glut will continue. Many companies are preparing their budgets for the lower price market with write-downs becoming more common as other options dry up.

Hawaii has become the solar energy testing ground of the US. Unsurprisingly, solar has done well in the isolated and sunny state which has led to an interesting case study in solar and energy storage. Since the existing net energy metering tariff allowed homeowners to sell unused solar energy at the rate they would be charged to buy from a utility and retail rates are high in Hawaii, solar homes saved significant amounts in electricity costs. With the newer legislation, homeowners choose between self-supply, grid-supply at a reduced rate, and time-of-use rates. Storage is required to meet benefit level provided under the old system increasing the cost to home owners but adding an incentive to lower storage costs and increasing grid reliability as in-home battery systems smooth electricity usage.

Other issues in the news:

In distributed energy generation – Net-metering compensation is facing opposition as utilities see payments canceling income from electric bill, connection fees for grid access remain a touchy issue since home owners pay nothing into maintenance of the system they use to sell back electricity, and feed-in tariffs may see drop offs with the approach of grid parity as renewables become more economically competitive with oil and gas.

In Japan – Since the Fukushima disaster, Japan has been reluctant to embrace nuclear power again and, as a result, some of its cities have taken interest in other renewable energy sources. Though the country depends upon imports for almost all of its needs, the desire for self-sufficiency have led Japan to mimic the German system where municipal utilities took a greater role in production having a significant impact on traditional suppliers.

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