Why are oil prices so low and what does it mean for alt energy?

WTI Oil Prices 1986-2015

Haven’t been this low since the crash of 2008

Oil prices are lower than they have been in 4 years, but what has changed lately?  At first glance, not much in the big picture: no big new reserves have been found or really cheap ways to extract & process oil.  It is a matter of supply and demand, but why is the supply high (thus driving the price down)?  Well, it is an interesting business strategy that OPEC engaged last fall.  Mostly in response to this:

Yes, the rapid increase of US oil and gas production (mostly thanks to fracking) has OPEC worried.  Rather than cut their production, they hope to hurt other producers with cheap prices.  We’ll see how it turns out, but in the meantime, enjoy the cheap prices at the pump!

How does this affect nascent alternative energy technologies?  It really depends on whether they were directly targeting oil markets: so wind, solar, and other electricity producing technologies aren’t really affected.  However, technologies that are trying to produce liquid fuel for transportation usually depend on business models that allow production for similar prices as the current oil price (price parity).  If these technologies weren’t already struggling with political uncertainty, and a lack of progress on climate change mitigation (which favors low carbon technologies), now they might be.  However, the RFS could be their savor, since it almost guarantees them a market!  BUT NOT QUITE.  As pointed out here, there is an option to just pay ($1.45/gallon currently) instead of actually buying and blending the fuel.  So it is unclear what will happen with current producers, but the investment in new plants and technologies will likely suffer.

PS: Not everyone agrees with the analysis here, and other ideas exist.  However, what I discuss seems the most reasonable explanation and the Economist also believes it (also see the “dig deeper” links after that article).  Also this article has lots of pretty graphs 🙂

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One Response to Why are oil prices so low and what does it mean for alt energy?

  1. Paul says:

    case in point:
    Top drillers say they’ll sit on wells until prices go back up
    http://www.eenews.net/energywire/2015/02/26/stories/1060014049

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