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Could New Oil Production Cause Oil Prices—and Energy Innovation—to Collapse?

A Harvard researcher says unparalleled investment in oil exploration is creating a boom in supply, and that could hurt the development of oil alternatives.
June 26, 2012

A new report out of Harvard suggests that a boom in oil exploration and production—driven by a surge of investment starting in 2003—might lead to a sharp drop in oil prices. If that happens, could that kill development of alternatives to oil, as happened when oil prices hit bottom in the 1990s? Will solar panels, electric cars, and advanced biofuels fade from view?

Three decades ago, high oil prices spurred investment in alternatives. But by the time oil prices had bottomed-out in the 1990s, much of that research had been abandoned, and promising technologies didn’t come to market or weren’t made cheap enough to catch on widely. With the surge in oil prices in recent years, much of that research has been taken up again, and the trends look good. Solar power is approaching the cost of conventional fossil-fuel power, and advanced biofuels seem on the cusp of becoming commercial reality. As new energy startups proliferated, many alternative energy researchers and companies waved away suggestions that oil might plummet again, causing these technologies to be abandoned once again. The conventional wisdom has been that high demand from fast-growing economies will keep oil prices high enough to drive innovation. And concern about climate change will lead to a price on carbon that will drive new technologies even if oil prices drop.

But interest in climate change seems to have waned, and efforts to put a price on carbon dioxide emissions have failed in the U.S. and most of the rest of the world. If oil prices also drop due to overproduction, as the report suggests, what could that mean for technologies such as electric cars, advanced internal combustion engines, and renewable electricity sources, such as solar power?

Taking solar power first, things are a bit different now than in the 1970s, at least in the United States. The oil crisis spurred investment in solar power in part because oil was used to generate a substantial amount of electricity in the United States. Now the U.S. hardly uses oil at all for generating electricity, and installing solar panels doesn’t do anything to decrease oil consumption. Some people don’t know that, and support solar as a way of reducing oil consumption—their support could fade with high oil prices. Such public support is critical for the solar industry now, since it relies heavily on subsidies. More importantly, while the U.S. doesn’t use oil for electricity, much of the rest of the world does. At current oil prices, solar power is cheaper than electricity from diesel generators, and that’s creating a new markets for solar panels. A drop in oil prices could hurt the solar industry.

But solar panel prices have been dropping quickly, and some solar companies, such as First Solar, are staking their business on the prospect that they can soon be competitive in unsubsidized markets. There’s a race on. If the oil price drops within the next couple of years, that could be a bad sign for the solar industry. If it drops later, the solar industry may be able to survive on its own by then, even if it’s hurt some by lower prices.  

A drop in oil prices could really hurt advanced biofuels companies, which are struggling to get prices low enough to compete with even today’s relatively pricey oil. Low oil prices could further deteriorate already strained support for advanced biofuels.

And low oil prices could also hurt attempts to sell electric cars, and cars with costly efficiency improvements. Automakers have struggled to sell electric cars even with relatively high gas prices. If oil prices drop, will new fuel economy standards that are driving automakers to sell more efficient vehicles hold up?

Predicting oil prices is hard, and so is predicting their impact on innovation. The author of the Harvard report, Leanoardo Maugeri, notes that it’s hard to say how much oil prices will drop, or how long they will stay low. A global economic boom could even lead to yet higher prices. But the prospect of an oil price collapse is worth considering. It’d be a shame if energy innovation collapses again. 

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