So what happens to big, green energy endeavours now that oil is trading in the low $70s? At these prices, options like wind and solar are no longer at the level where they’ll save you money. It was easy to believe in Super Spikes and Hubbert’s Peaks when oil was going up every day, but now even oil uber-bull Goldman Sachs sees oil going back to $50.
The lower oil goes, the more un-economic alternative energy sources become. Check out the chart below:
(Chart from Credit Suisse, via Nyquist Capital)
As you can see, at these levels, a range of options stop being profitable. Drop down a little more, and even gas-to-liquid, one of the more realistic energy solutions (in the short to medium term) stops being worthwhile.
The Wall Street Journal has more, noting that it’s not just the fall in oil, but also the contraction in available credit that’s hurting the industry. Those big solar installations and wind fields take cash, and lots of it:
U.S. wind-farm developers, which have commitments to build a record number of projects in 2009, are also scrambling for alternative sources of credit after the troubles of Lehman Brothers Holdings Inc. and American International Group Inc., both of which were big lenders to the green-energy sector, says Eric Silverman, a partner at law firm Milbank, Tweed, Hadley & McCloy LLP in New York.
“The credit crunch deals a negative blow to the whole [wind] sector because it’s heavily dependent on debt financing,” he says.
General Electric Co.’s GE Energy Financial Services, another major investor in U.S. wind-farm development, is cutting back outlays because the credit crisis has made it difficult to price investments. “This is a very tough market for any investor,” says Andrew Katell, a spokesman for GE Energy Financial Services. “Everyone is impacted.”
It’s an open question — if you still believe in peak oil, the inevitabilty of laws limiting carbon-based fuels, and the hundreds of new millions of cars that will one day be on the road in China and India, then the dip might not matter much to the industry. But we suspect that a lot of investors who, just six months ago saw all these things as a given, may now pause and wonder if that’s the only scenario.