Energy

Oil recession favors a shift to renewables for investors

The environmentalist has conducted several campaigns and initiated companies and programs like the Greenhouse Gas Initiative that aims to minimize carbon emission through shifting energy production from fossil fuel to renewables. However, investors and oil companies have persisted in oil production and resultantly offering financial incentives to oil companies and users. Additionally, a shift in renewable energy in many countries seemed unprofitable and required a high investment compared to oil production. Nevertheless, as the globe encounters a pandemic due to the coronavirus, the oil prices came to a stumbling block, initiating a drop in its price.

Likewise, the drop in oil prices paved the way for investors to rethink investing in renewables since it presented an attractive investment compared to fossil fuel. According to an analyst, the drop in oil prices predicted major economic breakdown in countries dependant on oil as its primary income and a significant hit to other countries. Despite the oil recession, analysts state that renewable energy like the wind and solar are not anticipated to be affected during the oil price breakdown. 

On the other hand, Dr. Valentina of Corporate Research stated that the Internal Rate of Return (IRR) in renewable energy is currently comparable to oil investment at $35 Brent crude. Also, low oil prices imply a reduction in returns. As stated above, the oil and renewables are comparable since solar and wind energy production offer a 5 to 10 percent return while oil and gas offer 20%. Therefore, the oil price crash provides an attractive investment in renewables. 

Consequently, 2016 presented a significant collapse in major oil companies, which resulted in the oil firms to switch to survival mode. Likewise, this year offered a financial set back due to the coronavirus pandemic; hence a severe financial constrain is yet to be experienced by the oil companies. Luckily for the renewable sector, the Big Oil’s investment in solar and wind energy constitutes of two percent investment. Therefore, if the Big Oil opts to bail out of the investment, the renewable companies will still run efficiently since the impact is minimal.

According to WoodMac’s estimates, the oil prices over the years are indirectly proportional to solar and wind installations. The research was backed up by relevant data and tabulation of the Big Oil prices and national solar and wind collective installations in the 2015-2016 financial year. The oil market volatility thus necessitates Big Oil to shift capital allocation from fossil fuel to renewables in a short period to compensate for the losses experienced in an oil price crash. 

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