Alternatives will never be able to replace fossil fuels -

Big oil is not worried about alternatives, oil prices are lower, and consumers will again go into a slumber from worrying about high energy prices, old habits will rein supreme again. But is it different this time? Aren’t solar companies producing solar panels which are really becoming cost competitive? Will China turn into a mass producer of solar panels that will drive the cost to the floor?

Even if the oil industry believed that solar or wind was an economical choice, what could they do with 100 years of investment in fossil fuels? How does Exxon quietly exit fossil fuels? For awhile a few energy companies had jingle that went like, we are not a fossil fuel company, but an energy company, meaning we can sell any energy. It sounds logical, but is even remotely possible that fossil fuel based company will adopt alternative energy? On the flip side no way will alternative energy companies be able to provide the vast amounts of energy the world consumes in a day. Sounds like a messy dislocation is coming.

Think of the impacts of solar or wind energy on profits from fossil fuel. Imagine thate the marginal energy user now switches to solar or wind, that reduces the demand at the margin, and that lowers the price of energy across the entire market. At least that is what I learned in economics. Maybe 10% renewable based energy would set the market price or reduce the profit for what will still be big oil.

Now in the 80s and 90s, I always heard that Saudi Arabia sets the price of world oil. How? The Saudis only controlled 8-12% of the market. But it was common knowledge that Saudi Arabia had control of enough market share to set the price.

Now if renewables were to get to some level, say producing 10-15% of the energy, wouldn’t they have the ability to do the same? You can’t be selective about market pricing impacts, if Saudi Arabia could and in fact did set the price during the 80s and 90s, then it must be true that another country which approaches that production size or another source would, could, and will do the same. When I state this that renewable could impact the price of energy in a few years, maybe 10 years, this is roundly met with laughs.

But if the price of fossil fuels is impacted by renewables we have an interesting intersection of events.

Oil will continue to become more expensive to produce over the next 10 years, I think there is wide agreement on that.

Renewables such as solar are continuing to come down in price, weather or not China becomes a mass producer or not, simply look at the price per kilowatt over the past couple of years, it has dropped.

So we have two trends that we should have wide agreement on, oil prices swing widely but, the base price to produce oil is rising, and due to technology and production advances solar energy is dropping in price. Oil based energy is cheaper then solar currently.

When the two price curves intersect, then the price of power will be capped, why buy expensive oil produced electricity, when you can get cheaper solar produced electricity. Now in reality you will have to, because solar will only be able to produce so much electricity. At that point, producing oil will become progressively more expensive, and these increased costs will not be easily passed onto consumers. The impact on profits at oil companies will be dramatic and felt long before renewables become a major producer of energy. I would guess that the stock market will realize this and it will reflect in the price of oil company stocks.

The consensus right now is with increasing demand, oil companies can be almost limitlessly profitable. In fact that is not true, at some level maybe $150/bbl, the world will go into a recession, maybe at $100/bbl as we have seen. But oil is widely seen as a great place to invest and will be profitable for years to come, any disruption of that outlook will have impacts on investing.

Making Money
It seems so simple buy solar companies and short big oil, especially the high cost producers. But when will this theory come true? Today? No, Next year, in 5 years time?

Now you can pass legislation all day encouraging energy conservation, but when energy prices soar, a landslide of energy conservation is unleashed. The lesson is that free market capitalism is more effective then government and it can turn on a dime.