Impact of fuel prices on development and use of Renewable energy sources

23. January 2012. / Uncategorized

 

ENERGY INVESTMENT AND PRICING RISKS

The increased use of energy from renewable sources is an important package of measures needed to reduce greenhouse gas emissions and comply with the Kyoto Protocol to the United Nations Framework Convention on Climate Change, and with further European and international greenhouse gas emission reduction commitments beyond 2012. It also has an important part to play in increasing security of energy supply, promoting technological development and providing opportunities for employment and regional development. However, renewable energy sources require high investments. One of the most difficult aspects of investing is pricing risk .

The reward proposition is exciting and is much easier to calculate than the risk, so it tends to get much more attention from investors. Normally risk-pricing instruments work well, but when such events occur, like all the banks suddenly becoming insolvent at once and the risk insurance fails, the damage to the economy can be massive. In this most uncertain time for the global economic outlook, investors must be unusually alert to mispriced risk not only because it offers incredible buying opportunities, but because the risks are enormous. The most important risk in the energy field is from the oil prices at the world market.

Oil is better priced now than it was a few years ago. This is so even after a downturn from August 2008 peaks over 140 $/bbl. Still, the risk of peak oil is not properly priced when oil itself is priced over 70 $/bbl today, and the economy as expected to recover again in 2012. If the world will wait until the terminal decline of oil sets in before taking effective action, and realize that the consequent changes will affect every industry and every part of the economy, then it will turn to a long list of other risks that are badly mispriced. Oil and natural gas prices will have a very volatile upward trajectory for decades, but oil will probably top out around 150-200 $/bbl, where it simply cutails demand.

Oil supply will decline at the rate of about 5% per year and accelerate to 10% per year. The world will be living with about half its current energy budget by 2050. Once oil decline sets in, the world must be worrying about finding fuel to put in the engine. Demand will be destroyed first by skyrocketing fuel prices, which will eliminate more CO2 emissions than our climate treaties ever contemplated. Peak CO2 will probably happen before the atmospheric CO2 concentrations reach 450 parts per million (ppm), corresponding to the global temperature rise limit of 2

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