In early April, eight members of OPEC (the Organization of Petroleum Exporting Countries) announced they would slash oil production1 by a combined total of 1.16 million barrels per day beginning in May for at least the rest of 2023. The recent slash comes after the group announced a 2 million bpd cut last October, bringing the total reduction to 3.7% of global demand2. The eight OPEC members1 include Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman.
In the immediate aftermath of the announcement in April, oil prices achieved the intended goal by jumping 5%1, surpassing $85/barrel for the first time in years. One of the major concerns1 of this latest slash in oil production is what it might do to the price consumers pay at the pump and to inflation as a result. The Federal Reserve has been raising interest rates for more than a year in an aggressive attempt to lower inflation. Higher gas prices may undermine the Fed’s efforts and exacerbate an economic slowdown.
This latest swing and its aftermath on the economy is just the latest example of oil’s history as a volatile commodity. The market price of oil accounts for 5% of global GDP3, so when it fluctuates 50% in a matter of months, the effects are felt deep and wide. Oil prices are volatile largely because the oil industry is an oligopoly, whereby few large producers—OPEC—control the market of an undifferentiated product—oil—with high barriers to entry. OPEC has the power to manipulate oil prices through supply controls, which only adds to the volatility caused by unpredictable conflicts and natural disasters4 in oil-producing regions.
While the sun doesn’t always shine and wind doesn’t always blow, renewable energy offers a far more stable alternative to oil3. In addition to its carbon footprint, renewable energy shares very few of the oil industry’s oligopolistic qualities. First, renewables are highly diversified across sources (wind, solar, hydro, geothermal and nuclear), scales (from startups to multinational corporations), and industries (ie. transportation, manufacturing, utilities infrastructure, and tech). Also unlike oil, entry and operating costs are low, which allows more players to enter the market and production costs to stay effectively locked3 and stable for decades.
Transitioning from oil to renewables migrates energy consumption into the electricity sector5, which is highly regulated with a history of stable pricing. The diversification of the industry and its market share, not to mention the nature of its sources, also protect against localized shocks from rocking the global economy. With more investment in renewables, countries have more control over their own energy supply to compensate for oil volatility or replace it altogether.
In addition to its stability, renewable energy has become competitive on price6. Renewable prices3 have dropped dramatically with low price volatility over the past few decades due to advanced technologies, increased investment, and more government-funded programs. Worldwide renewable energy consumption7 per capita has also increased over time, with exponential growth beginning in the early 2000s. Conversely, global oil demand is expected to decline 75% by 20508 and has already been declining per capita9 in the U.S. and other high-income countries since the late 1970s.
With low and stable prices, strong growth, low market saturation, and long-term upside potential, renewable energy is an even more attractive investment option in the wake of OPEC’s latest production cuts.
To learn more about TrueShares Eagle Global Renewable Energy Income ETF (RNWZ), visit https://www.true-shares.com/rnwz/
- https://www.cnbc.com/2023/04/03/oil-opec-just-made-the-feds-job-more-complicated-heres-what-they-did.html
- https://www.reuters.com/business/energy/why-is-opec-cutting-oil-output-2023-04-03
- https://www.sei.org/featured/renewables-safer-bet-price-volatile-oil/
- https://www.investopedia.com/ask/answers/012715/what-causes-oil-prices-fluctuate.asp
- https://rooseveltinstitute.org/publications/energy-price-stability/
- https://www.bloomberg.com/graphics/climate-change-data-green/investment.html
- https://ourworldindata.org/grapher/modern-renewable-energy-consumption?country=High-income+countries~Lower-middle-income+countries~Upper-middle-income+countries~OWID_WRL~USA
- https://www.mckinsey.com/industries/oil-and-gas/our-insights/global-energy-perspective-2022
- https://ourworldindata.org/grapher/oil-consumption-per-capita?country=USA~OWID_WRL~Upper-middle-income+countries~High-income+countries~Lower-middle-income+countries
