April 22nd, 2015
in Op Ed
by Kent Moors, Money Morning
Throughout the recent collapse in oil prices, I've been telling my readers about a very unusual development in the energy sector: Alternative energy isn’t taking it on the chin (despite low oil prices).
I say "unusual" because unlike other episodes of falling oil prices, other forms of energy like wind and solar power haven't reacted with reduced demand.
You see, when oil prices decline, there's always an inevitable uptick in demand.
The reason for this is simple: Markets tend to use more of a cheaper product. After all, when prices at the gas pump are low, a family trip across the country is much easier to plan.
This increase in oil demand has historically caused other forms of energy to stagnate.
But, as I've been writing, that just hasn't been the case.
This dislocation is going to hand us several new ways to profit...
Oil Prices Are Still Too High in Developing World
Of course, as I've written before, low oil prices are not a permanent condition. Over the long term, oil prices are going to "ratchet" back up.
This means we will have numerous dips and plateaus along the way.
As of close yesterday, West Texas Intermediate (WTI) - the benchmark crude rate used for futures contracts in New York - stood at $56.38 a barrel. While that is a 23% improvement for the month, it's still only the best close since mid-December. Overall, WTI is still down 47% from its high of $107.26 on June 20 of last year.
As expected, with prices so low, we are seeing rising demand for oil... but only from the U.S., Canada, Western Europe, and the rest of the "First World." Elsewhere, it's a completely different story.
The axis of energy consumption is shifting away from the "West." Increasingly, energy demand is being driven by developing nations and even countries lower on the income scale. In this part of the world demand is higher for alternative forms of energy.
Given the premiums often required to secure oil, much of the world pays higher prices for crude than we do in the U.S. These premiums result from insufficient and/or inefficient local production or generation, bad distribution, corrupt practices, and a number of other factors.
In addition, significant domestic market volatility in almost everything essential to daily life makes oil prohibitively expensive.
This is the case even for the world's major producers of oil.
For example, consider Nigeria.
Major Oil Producer Should Rely on Renewables
Nigeria is a large producer of light, sweet (low sulfur content) crude. This is the most desired type of oil because it is cheap to refine. Nigeria is the largest exporter of oil in Africa, and the 10th in the world.
Unfortunately, the country has a terrible refinery sector and produces only 15% of the electricity Nigeria requires on a daily basis.
That means 85% of the electricity each day is privately produced from diesel fuel imported for much above normal market prices. One of the world's leading exporters of oil must rely upon bringing in basic oil products.
This week, The Guardian offered a solution to Nigeria's oil woes:
"What Nigeria should instead focus on is investing very massively in the area of renewable energy, and this is simply because many countries today are discovering that cheap energy can be harvested from a rich variety of sources, and these sources - the sun, water, wind, and biomass - are in abundance in Nigeria."
This reflects an overarching theme throughout the developing world.
In 2014, China led the way, with $83 billion devoted to "clean" energy funding. followed closely by Brazil and India. Kenya has one of the largest solar rooftops systems in Africa, and will soon boast the continent's largest wind farm.
These developments have made the prospects for renewable energy sources - solar, wind, and biomass - better than they have been in some time.
Why Grid Parity Means Green Profits
With renewable energy sources - especially solar and wind - we're seeing a sharp dislocation from oil prices. As the price of oil moved down, solar and wind generation moved up.
There are several reasons for this, all of which will improve our profit opportunities moving forward.
For one thing, these alternative energies are reaching grid parity with natural gas-fueled power plants. "Grid parity" refers to different sources of energy being able to deliver electricity at the same cost.
This parity is being achieved without government subsidies or mandates that utilities buy a certain percentage of power from only such alternative sources. Deutsche Bank just released a statement predicting that solar systems will be at grid parity in up to 80% of the global market within two years.
In addition, the infrastructure necessary to harness solar or wind and then integrate into the existing network is now available in many of these developing countries, reducing future capital expenditure requirements and thus lowering costs.
And where it hasn't been built yet, plans are underway.
India recently announced that it will issue bonds to build out its renewable energy infrastructure from current 35 gigawatts to 175 gigawatts by 2022.
The delivery system for the energy utilizes existing power grids. The end user need not change anything. After all, if the price is the same, few care where the power is actually coming from.
All of this means that low prices for oil no longer translate into lower interest in other energy sources. In fact, there's a widening scale of attractive investment opportunities in renewable energy around the globe.
Stay tuned for further news on this new energy development... and how we are going to profit from it.