Crude Oil’s Impact on Renewable Energy

Energy alternative or energy staple?

Over the past seven months, the drop in the crude oil price has generated uncertainty among petrochemical stakeholders, with many planned projects postponed and financing bodies unsure about the extent and future impact on financial returns. For the petrochemical industry, there is an inherent relationship between crude oil as a primary raw material and downstream petrochemical derivatives. However, the impact of crude oil on an adjacent sector like renewable energy is less defined. Factors such as legislative mandates, competitive substitutes, and varying regional impact must also be considered. The following analysis presents a discussion of these elements, concluding that:

  • The dependency on crude oil for power generation has been decreasing, diminishing its impact on the economic competitiveness of renewable energy while increasing the need to assess renewables against alternatives such as natural gas, coal, and nuclear.
  • Crude oil’s drop in price has highlighted the attractiveness of renewable energy’s relative isolation from fuel-price fluctuations. The certainty in up-front capital costs and “zero” raw material costs is favorable and inherently lower-risk when compared to petrochemical-based projects where forecasted project ROI is dependent on the accuracy of raw material forecasts.
  • The removal of fossil fuel subsidies and the continual drop in renewable technology capital costs will increase the margins captured by leading players in the renewables industry. A possible tipping point may be reached where fossil fuel-based power will in turn be set by the cost of solar or wind energy.
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