The last month of 2014 finds oil at the hitherto nearly unbelievable brink of falling below $60 a barrel – a level it hasn’t seen since mid-2009. Reams of ink has been spilled on what this means, why OPEC has failed to curtail production, whether the Saudis are trying to knee-cap the US shale gas industry, and whether (and when) crude will bounce up again as it has in the past after a large drop.
Our concerns lie more in the direction of the oil-driven pressure on clean energy stocks. There have been suggestions in the market that this shows a causal relationship between oil and the clean energy sector, ie. when oil prices are high, clean energy and renewables are attractive as they become cost competitive. Conversely, when oil prices fall, efficiency investments and clean energy generation are not as attractive because they have become relatively more expensive.
Though oil and energy stocks have fallen in tandem, we view suggestions that clean energy has become more correlated to oil and energy in stock market terms as being statistically premature and conceptually misguided. There was little correlation before the current oil price slump, and most scenarios expect clean energy will grow dynamically as a portion of the energy pie from here. We therefore view the oil driven pressure on clean energy as an opportunity.
On top of the oil price plunges, European utilities are showing particular strain. E.On recently announced that it is splitting in two – conventional generation in one half, and the “new” half retaining its renewables, distribution and retail units. Distribution and retail is expected to account for over 80% of projected earnings. Swedish energy giant Vattenfall is making a last-ditch effort to sue the German government for phasing out nuclear and replacing it with renewables, demanding 4.7 billion euros in compensation.
Categories: Economic Indicators