Why oil prices can’t sustain beyond $80

As with every asset bubble, one can now hear people shrieking that oil prices will climb over $100 per barrel.

Maybe they will, but most probably they won’t. And even if they do climb, the rise may turn out to be short-lived.

This is on account of several factors. First, oil companies may have misjudged the surge in demand for oil, just as they did last year.

The peak in demand did not happen last winter, notwithstanding forecasts that the severe winter could see oil prices surge. It is unlikely to happen during these summer months, notwithstanding the amazing economic growth in Asia (including India) and Africa.

There is a second more interesting reason as well. There is a good possibility that the the energy balance for the entire world will change very soon. People are likely to witness more sources of energy than ever before.

This includes hydrocarbons, alternative renewable, and unconventional energy as well. And some of the most challenging development could come from the solar power sector. In fact, believe energy analysts, it could be solar power - and possibly shale gas — that could change the very market dynamics for oil.

One of the reasons why solar power has become attractive is because of the way Germany began promoting it since 1999. But more of that later.

Thanks to this, the price of each one-watt module of photovoltaic or PV solar power crashed from around $30 some 15 years ago, to less than $3 per watt three years ago.

Then, thanks to German innovation, the clamour for more ‘green-power’ that was environment friendly (which hydrocarbons are not), and also the manner in which the Chinese have begun using their fabled mass production muscle to push down solar power module prices further, these prices have now fallen under $1 per watt for the first time in history.

“The Holy Grail of PV panel costs was $1/watt,” explains one energy analyst, who did not want to be named.

“Some companies claim they have technology in place to meet $1 price and it will happen in 2-3 years at most. China has been far more aggressive in solar investments compared with the US - it has planned 14 gigawatt of solar power capacity in the Gobi desert.”

In fact, some companies in the US have, reportedly, already begun offering bulk pricing of 80 cents per watt, though confirmation for such pricing cannot be got from authoritative websites like www.solarbuzz.com, which still put pricing at around $3.5 per module with the lowest thin film module price at $0.95 per watt.

The $1 pricing is interesting and extremely significant, because it translates to just around Rs45 per watt.

Coal-based thermal power plants in India cost around Rs4 crore per mw.

Each mw translates into a million watts, which, in turn, converts into Rs40 per watt of installed capacity.

It is at such a time that solar power becomes as cheap as coal-based thermal power in terms of installation costs.

But there is another angle to it. It conceals the fact that unlike coal-based thermal power plants, solar power plans require no operational costs (there are no fuel costs to be met) and hardly any maintenance.

The only cost that may have to be met is that of the battery (Rs7 per watt in Europe and Rs9 per watt in the US), and perhaps the inverter (Rs30 per watt).

But even the costs of inverters and batteries are likely to come cascading down thanks to innovations both in China and the US. According to the latest issue of Fortune-India, China expects 9% (or 5 million) of its vehicles to be all electric by 2020.

This has major implications for India. It could mean that solar power could, within a few years, become cheaper than coal-based thermal power.   

Add to that the benefit of low carbon emission. Third, there is hardly any maintenance cost. If the solar power is consumed largely by the building that generates it, then there are no transmission and distribution (T&D) costs, which are almost equal to the cost of generating power.

This could make solar the best solution for rural areas - where electricity could be generated by the village, for the village, with little maintenance cost, and no T&D costs. That could also prevent T&D losses, which are often a euphemism for power theft (but more on that later).

Add to this moves made by players like Reliance Industries and ONGC to begin extracting shale gas, which is likely to be priced at les than $60 per barrel in energy equivalent terms.

Unlike oil reserves, which are likely to last barely six to eight decades more, share gas reserves in India are expected to adequately meet India’s requirements for the next 300 years.

The combined clout of PV solar power and shale gas could ensure that oil prices do not climb beyond say $70 per barrel.
And if the right policies are in place - like those introduced by Germany more than eight years ago - India could become the most important producer of solar power in the world.