Solar Boom Adds to Pressure on Energy Prices

The solar business is booming. In the United States solar is now larger than natural gas by some measures. The solar boom defies conventional thinking that predicted that low prices for fossil fuels would hurt demand for renewable energy sources. With the price of oil dipping below $30 this month and low prices for natural gas at the same time, where will the demand for solar come from?

That thought is based on sound economic reasoning but misses important details. First, the cost of renewable energy is also falling. The cost of solar panels is less than the cost of installing them, and prices continue to fall. It is astonishing that the price of oil has fallen by more than half in the last four years, but perhaps more astonishing that the price of solar panels did so too — after starting at what was already an all time low. Second, few people believe that oil prices will remain low. Recent technological innovations have reduced the cost of extracting oil, but in the long run, that just means the world will run out of oil sooner. Long-term bets are not on oil, but on energy sources that will cost less than oil in the long run.

I would argue that analysts who expected falling prices for oil to kill off the demand for solar are looking at the situation backward. As the world installs solar panels and looks for other ways to burn less oil, this diminishes the demand for oil, which in turn puts pressure on the price of oil. It is an effect that will only accelerate over time as solar technology improves and installed capacity increases beyond niche status.

Oil prices are particularly vulnerable to soft demand because oil is so expensive to store. Oil producers might want to find a way to solve that problem next so they aren’t forced to sell everything they have at the day’s going rate.

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