3 charts explain why the oil crash won't hurt utilities
3 charts explain why the oil crash won't hurt utilities
This article first appeared at Opower.
The price of crude oil has plummeted in recent weeks, hitting its lowest point since 2009. Driven by a perfect storm of increased oil supply and weakened oil demand, the price drop has rattled financial markets and provoked uncertainty about where oil prices are headed in 2015.
When oil prices tumble, there are winners and losers. Among the winners are car drivers and airlines, who find it cheaper to fill their fuel tanks. Among the losers are oil-producing companies, who get fewer dollars for every barrel of crude they sell.
What about power companies? It’s tempting to think that utilities, insofar as they are key players in the energy world, also might be adversely affected by convulsions in the oil market. But that would be incorrect.
The reality is that changes in oil prices have little or no impact on the utility sector, nor does cheap oil weaken the business case for utilities to lead on energy efficiency. Here’s why.
1. Oil plays a negligible role in electricity generation
Only 5 percent (PDF) of the world’s electricity production comes from burning oil. And the small handful of countries that are still dependent on petroleum-derived power, such as Saudi Arabia and Nicaragua, have aggressive plans to shift away from it.
Source: C2ES, from U.S. Energy Information Administration data (May 2014).
The upshot: oil and its price are simply immaterial to most nations’ electric power sectors, including America’s.
2. Oil prices are not tightly linked with the price of a fuel that does matter to power companies: natural gas
Oil and natural gas are close siblings. They’re both made of millions-of-years-old dead plants and animals, they’re often found and extracted from the same underground reservoirs (PDF) and production of both fuels is increasing due to mining techniques such as hydraulic fracturing.
But unlike oil, natural gas is an important fuel for electricity production — both globally (23 percent of power generation) and in the United States (28 percent of power generation). And changes in the price of natural gas do have a well-documented effect on the utility industry and a country’s electric generation portfolio.
In the past, a positive correlation did exist between oil prices and natural gas prices. But that correlation no longer exists. The historical correlation is indicated by the heavy green shading in the top left of the chart below, which displays correlations between daily price changes of crude oil futures and other commodities futures. Contrast the green shading with the mostly white space in the top right, which indicates a now weak correlation between oil futures prices and natural gas futures prices.
Source: U.S. Energy Information Administration (2014).
Why did the price correlation evaporate? Interpreting the chart above, the U.S. Energy Information Administration notes that “the historically strong correlation between oil and natural gas prices has recently ceased in North America, as natural gas prices have been kept down by the rapid development of shale gas.” EIA’s analysis suggests that the price of oil futures correlates more strongly with gold than with natural gas.
Similar spot-price analysis by the EIA reveals that between 2009 and 2012, the price ratio of crude oil to natural gas substantially widened: oil prices increased as natural gas prices simultaneously decreased. That divergence suggests that oil prices and natural gas prices no longer move together. Likewise, a special report in the New York Times last year argued that the price linkage between oil and natural gas will continue to erode worldwide.
Bottom line: Because oil prices are weakly linked with natural gas prices, utilities have little reason to pay attention to oil prices.
3. Even if oil prices stay low, investments in electric and natural gas efficiency will persist
A casual observer may think that because oil prices are falling, the general “cost of energy” must be, too. In turn, they may conclude there’s less of a reason to use energy efficiently.
For the reasons described above, that logic is woefully incomplete.
Oil is not synonymous with energy. It is true that oil is the most consumed energy source in the world, accounting for 40 percent (PDF) of all total final energy consumption. And it’s also the predominant fuel for certain industries — in the U.S., for example, 95 percent of the energy used for transportation comes from oil.
But when it comes to utility-provided energy, oil just isn’t relevant.
While a lower oil price very slightly may weaken the incentive to be an energy-efficient driver, it doesn’t affect the undeniable economics of encouraging the efficient use of electricity and natural gas in homes and businesses. As we’ve recently reported, utility programs to reduce energy consumption are astonishingly cost-effective, often yielding around $4 in aggregate benefits for utilities (who enjoy lower operating costs) and consumers (who enjoy lower bills) for every $1 invested.
That return on investment can help explain why utilities continue to expand their efforts to help customers save energy, year after year. Utility investment in efficiency programs nearly doubled (PDF) between 2008-2012 (the latest year for which full data is available), even as global oil prices zigzagged up and down again and again. Annual efficiency spending by utilities is expected to get even bigger over the next decade, according to an industry analysis (PDF) by Lawrence Berkeley National Laboratory.
Source: Consortium for Energy Efficiency (2014).
So when the falling price of oil comes up at your holiday party this year, remember the facts: It’ll change the price you see at the gas pump, but it won’t affect your power bill or the benefit of lowering that bill.