Why Low Oil Prices Won’t Doom Clean Energy

The conventional wisdom seems to be that the steep decline in world oil prices will dramatically slow investment in and use of various forms of “clean energy”–wind, solar, and biomass in particular.

It is true that declining oil prices have led to lower prices of natural gas, which is a much cleaner fossil fuel than oil or coal, and that some gas exploration projects, like those for oil, are likely to be put on hold until oil and gas prices (which are closely linked) rise back up somewhat and stay there.

But true renewable sources of energy–wind, solar, and biomass–may be much less adversely affected by the plunge in oil prices than is widely believed. A recent blogpost on the Brookings Institution Web site by Devashree Saha and Mark Muro singled out two reasons for this seemingly counterintuitive conclusion:

First, oil is used primarily for transportation and not to produce electricity, whereas renewables play an increasing role in producing electricity. In other words, oil and renewables are not direct competitors.

Second, over the longer run, because of continuing technological improvements, the prices of renewables, especially solar power, are likely to drop much faster than is the case for commodity-based fuels such as oil. The prices of commodity-based fuels, which are traded in deep, liquid markets, also tend to be more volatile than those of renewables, for which there tend to be no separate markets (especially for fuels that are just inputs into generation of electricity).

Bottom line: The oil price plunge is good for consumers now and may not significantly halt the gradual increase in the share of energy generated from cleaner, renewable sources.