Oil, Volatility and Transition

Oil, Volatility and Transition

Looking at the volatility that has gripped the global markets since the beginning of the year, one would assume global economic performance is solely dependent on the price of oil—which is inaccurate. We feel this point in the market cycle provides an ideal time to evaluate what’s occurring within the global markets and the opportunities that will arise once the noise settles.

What exactly is going on?

There has been a dramatic drop in oil prices which has spooked markets worldwide. WTI Crude Oil prices peaked at $148/bbl in July 2008; WTI Crude Oil prices have hovered around $30/bbl towards the end of 2015 and now have fallen below $27/bbl. One barrel of oil (abbreviated as bbl) is the equivalent of forty-two US gallons. What’s occurred in the seven years since the 2008 peak can be summed up in word: Glut! The US shale oil boom produced unprecedented amount of oil domestically, which reduced our dependence on foreign oil. Saudi Arabia and other OPEC affiliated countries responded to the US shale oil boom by maintaining pre-boom production levels to maintain market share. These two events were plenty powerful to drive the price of crude down in and of themselves; China - the world’s largest importer of oil- showing signed of economic slowdown in the latter half of 2015, United States lifting the forty year ban on oil exports at the end of 2015 and revocation of sanction levied against oil-rich Iran over the past year further exacerbated the decline.

A fall in oil prices is beneficial for consumers, businesses that use petrochemicals in production and business that need oil to transport people/products/goods. A fall in oil prices is adversarial to oil producing countries whose domestic budgets are dependent on oil revenues (Venezuela, Nigeria, and Saudi Arabia, etc.), oil producers dependent on certain price thresholds to maintain economic viability and the financial institutions who have provided loans to these companies under specific price assumptions for a barrel of oil.

This is the short explanation of the relationship between supplies/ oil production, its relation to the decline in oil prices and the market’s reaction. The price of oil will stabilize in time, but under new realities. There’s a much more interesting narrative beginning to unfold behind the scenes and we believe it’s time we delve into that further.


Based on the discussion above, you might assume this number has something to do with oil—it doesn’t! $329,000,000,000.00 represents the total investment in clean energy in 2015, which also happens to be an all-time record.

Previously it was assumed falling fossil fuel prices would stall further investments in clean energy, this is no longer the case. We continue to hear about the decline in fossil fuel prices (oil, coal and natural gas have experiences unprecedented declines in prices), but we aren’t hearing enough about the transition happening within clean energy and the effects that will have on our future. Since 2013 there has been a 29.5% increase in global alternative energy spending. Are you aware that wind and solar energy prices are falling to levels where in the words of the Washington Post “we continue to move into a world in which it makes sense to draw electricity from the sun or the winds, rather than from fossil fuels?”* Bloomberg New Energy Finance examined the “levelized cost of electricity” around the world in the second half of 2015 – the “levelized cost of electricity” is a metric that takes a comprehensive look at cost including capital expenditures, interest rates and operating costs;  analyzing 55,000 projects around the world Bloomberg New Energy Finance concluded that globally onshore wind now costs on average $83 per megawatt hour of electricity ($2 cheaper than in the first half of the year) and solar photovoltaics costs  $122 per megawatt hour of electricity ($7 cheaper than in the first half of the year). Link to Bloomberg New Energy Report

To put that in perspective, coal-fired electricity costs $75 per megawatt hour in the Americas and gas-fired generation costs $82 in the Americas.

In order for clean energy to remain viable two components are necessary: cost parity with traditional sources and government support of the industry in its infancy. The American Recovery and Reinvestment Act of 2009 included various production/tax credits for clean energy that sparked the clean energy momentum in America. The dysfunction of our congress put many of these credits into question over the past eight years; these credits were extended for another five years in the most recent budget in exchange for abolition of the US Oil Export Ban. Every major player in the clean energy space has stated emphatically this level of certainty allows for long term planning necessary to be successful. Every electric car on the road, photovoltaic solar panel you see on a roof and wind turbine you see in a field is slowly diminishing the need to pump additional fossil fuels out of the ground unnecessarily.

The International Energy Agency stated in 2012 in order to limit global warming to two degrees celsius, investments in low carbon energy technologies will need to reach $500B annually by 2020 and then double again to $1T by 2030. Clean energy investments have rose each year since IEA’s 2012 report.  Link to CERES report discussing clean energy investment gap

Let’s not mourn the decline of fossil fuels; let’s embrace the transition that is occurring before our eyes because it’s a game changer. There is an additional point that should not be missed with the context of transition to clean energy: all of the positive momentum we’ve seen the past year doesn’t take into consideration COP 21(aka The Paris Agreement ratified by 196 parties to reduce carbon footprint and keep global warming below two degrees Celsius); it’s not unreasonable to assume clean investment will continue growing at record sums as a result of this accord as well. Countries who are committed to adhering to the Paris Agreement will commit the financial resources to implement clean energy standards, which will further exacerbate the decline fossil fuel usage and propel clean energy investments well into the future.

Ryan Monroe
AJF Financial Services, Inc.

*Securities offered through American Portfolio Financial Services. MemberFINRA and SIPC. Investment Advisory services offered through AJF Financial which is not affiliated with APFS. AJF Financial Services, Inc. Is a SEC registered investment advisor.

*Opinions expressed are those of The Writer and AJF Financial Services, Inc., not necessarily those of American Portfolio Financial Services.



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*Securities offered through American Portfolios Financial Services. Member FINRA and SIPC.