Why Gas Prices Don't Predict Green Stock Performance

Oil and gasoline prices, as you likely have noticed, have been easing lately, even as we’re in the midst of what energy industry hands call “the summer driving season,” the period in which people tend to drive a lot for vacations and weekend visits and in general give energy traders reasons to bid the prices up. It’s hard to believe that one year ago a gallon of gas averaged $4.06 nationally, according to the Energy Information Agency. That was the highest weekly average since 1990–the low being early March 1999, when gas cost a mere 89 cents. Last week, the average price was $2.56, down from the year’s high of $2.60 a month earlier.

I bring up gas prices because as editor of the Cabot Green Investor, I have noticed that there is a fairly popular–and false–idea about the correlation between gas prices and Green stocks. The idea is that as the prices of oil products drop, there must be a decrease in interest in hybrid cars, solar panels and the like.

I contend it’s false for one simple reason: the daily fluctuations of a commodity aren’t going to affect whether someone chooses to go ahead with a capital intensive purchase of a geothermal heating system or an electric car, each of which has a much longer investment horizon than oil futures, which anticipate demand one month out. Yet some people (including more than a few professionals) trade Green stocks each day against the price of oil, surrendering longer-term gains.

I also assert it’s a false correlation because buying habits of Green products aren’t showing much signs of immediate influence by oil prices. This June, for instance, hybrid car sales were up 9% from June last year, when gasoline prices were 50% higher and the recession had barely begun. And as I mentioned in a prior column, sales of organic foods continue to rise each month, even as overall grocery sales have fallen ever so slightly this year. Another broader measure: Venture capitalist investment in Green companies surged 50% in the second quarter, to $1.2 billion.

There are two factors at play here making oil prices less influential in Green than many people think. For one, there is a recognition that oil’s current lower price is a result of the economic crisis and this doesn’t alter the long term reality that a rising China and India will further pressure tight world oil supplies.

The second is the more daunting fact that we are at a crucial point; the world must control carbon output or face dire consequences. Here is one telling tidbit from one of the many global warming reports I’ve read lately. The federal report “Global Climate Change Impacts in the U.S.” notes that from 1960 through 1990, there was one day a year that averaged 90 degrees or higher in Boston. By 2040, there likely will be 39 days over 90 degrees and more than 60 days annually by 2070, of which 24 should average over 100 degrees.

Of course this implies more than just a few more sweltering days–with that comes rising sea levels (over three feet is now likely within the century, according to this month’s New Scientist), more deadly hurricanes, water shortages and famine. Fortunately, we’re seeing people around the world taking action.

In Japan, for instance, the Liberal Democratic Party, which has ruled nearly uninterrupted for 50 years, is looking at near certain defeat in its upcoming election thanks to an unpopular position on greenhouse gas emissions. As the Green blog at http://www.TNR.com points out, the LDP wants to slash Japan’s emissions by 15% of 2005 levels by 2020. The people of Japan, the world’s fifth most significant greenhouse gas emitter, want more drastic cuts, which the rival Democratic Party of Japan is offering. The DPJ wants a 30% cut as part of a “Green New Deal for Japan.”

The term Green New Deal is being uttered in Korea too, coincidently–the South Korean government just announced a plan to invest $85 billion in Green technologies in the next five years. In China last month, the government raised its goal of how much wind energy it wants to generate by 2020 from 20 gigawatts to 120 GW. And I probably don’t need to tell you that over $100 billion of February’s stimulus package will go toward energy efficiency and Green technologies here in the U.S. The first tranche of that money is starting to make its way into the economy now.

Comments

[A Barrel Full:]

<i>the daily fluctuations of a commodity aren’t going to affect whether someone chooses to go ahead with a capital intensive purchase of a geothermal heating system or an electric car, each of which has a much longer investment horizon than oil futures, which anticipate demand one month out. </i>

I agree to an extent. However there are some complexix interrelations.

1) Ethanol & Biodiesel companies are directly correlated to oil prices
2) High oil prices give alternatives a massive amount of free publicity. The continue interest today is in part due to $147 per barrel prices of a year ago.
3) Most people buying clean alternatives are probably making emotional as much as economic decisions.
4) Rational consumers base decisions on long term expectations. But long term expectations are influenced heavily by today's price.
5) There is a corrleation between oil prices and green stock prices, even if its based on an error, so traders need to bear that in mind.

Jul 21 03:41 AM

[58robbo:]

You've got it all wrong. the reason oil prices don't predict green stock performance is 100% political. remove the politicians with their cap n trade, kyoto protocols and their 'green new deals' and you better believe that oil prices would directly influence green stock performance. As a keen environmentalist (who doesn't agree with the hypothesis of anthropogenic global warming) the first time i felt encouraged was with $150 oil spurring on the 'real' green innovation in the market. by real green innovation i mean the backyard inventors looking for simple, effective solutions to ease their consumption.

you seem to see the world in a different way. from your article i can only deduce that you think the solutions will come from massive taxpayer investment in corporate type green research. a green 'new deal'. that investment might produce products which marketing experts could spin off as green eg hybrids, but which will be anything but green.

you also fail to recognize surges in organic food, hybrids and solar panels as fads! i have been around long enough to remember naomi, claudia and cindy rather going naked than wearing fur! i am also current enough to have witnessed their hypocrisy. in the same way, people will eventually see the di caprio's, al gore's and prince charles's for what they really are and they will start to question the global warming movement's flawed computer models and temperature data. they will also see cap 'n trade for what it is, and orwellian stealth tax on the middle class.

if however you still feel that we have a role to play in the climate, why not encourage this administration to stop doing everything it can to stimulate consumption. why not get them also to stop subsidizing oil, gas and coal.

Jul 21 06:38 AM

[La Marque:]

Climate change is not the primary driver of green, Peak Oil is. I agree with both 'a barrell full' and '58robbo'. Supply and demand will increase energy prices and those who remember are taking action now as your first point states. The Japanese and Koreans like clean air and supposedly will vote for government action; that may be until they see the price tag. Green going ahead is because energy prices are going up regardless of changes in American driving habits. The rest of the world wants to live like us.

Jul 21 09:35 AM

[Zenfar:]

La Marque is on the money here. But I like the article because daily oil price changes should not affect green stocks, and lately they haven't been. Oils long term trend is up.

Also why wouldn't we want to control are own energy destiny? In business you want leverage in any deal, the more of are own energy we produce the more independent and wealthier we are as a country.

Long US Solar companies, CPST, BYDDF, QTWW, and XIDE.

Jul 21 10:08 AM

[58robbo:]

i couldn't agree with you more on energy independence. where i disagree with the article is on how we get there.

Whether we like it or not, energy consumption has been heavily subsidized by the taxpayer and especially the future taxpayer(through deficit spending) for decades. whether it is direct subsidies to coal, oil and gas exploration, or it is through the public creation of infrastructure which further encourage consumption (roads) or it is the through the costly military protection of our oil interests abroad, our energy is subsidized.

therefore we pay less for energy than it costs to discover, produce, refine and protect. i'm going out on a limb here but i think it would be safe to conclude that the less we pay, the more we use. this is apart from the 0,000001% of people who choose to use less. driving a prius and owning solar panels don't cut it because chances are you're californian and you'd never forfeit the opportunity for your kids to 'see the world' and get an 'education'......in europe or india....twice a year!

i'd prefer to stop all subsidies rather than sign in this ridiculous cap n trade idea and green new deal(which is propping up green stocks). nothing could put a bush back in the white house faster. imo, oil prices would go up but we'd pay less tax so politically this would be survivable. high oil prices through paying proper market price and not fads/taxes are the only real fertile grounds for green innovation


On Jul 21 10:08 AM Zenfar wrote:

> La Marque is on the money here. But I like the article because daily
> oil price changes should not affect green stocks, and lately they
> haven't been. Oils long term trend is up.
>
> Also why wouldn't we want to control are own energy destiny? In
> business you want leverage in any deal, the more of are own energy
> we produce the more independent and wealthier we are as a country.
>
>
> Long US Solar companies, CPST, BYDDF, QTWW, and XIDE.

Jul 21 11:40 AM

[Alan Young:]

If the market were rational, the prices should be independent. But since when does the market behave as it "should"? All you have to do is compare charts, and you can see that the argument is useless:

stockcharts.com/h-sc/u...

Jul 21 11:46 AM

[WayneS:]

Most people in the US don't know the difference between gas and gas.

58robbo - I agree we need energy independence, but disagree with you on your method. Petroleum is actually one of the more highly taxed industries. They don't get any more subsidies than everyone else gets. The major oil companies are selling their oil fields and not developing more in the US, i.e., it's not profitable. This means more dependence. The way to reduce foreign dependence is to reduce use. What is needed is higher consumer taxes similar to Europe. We Americans will continue to waste gasoline as long as it is so cheap.
If we were really interested in "green" other than how much money we can make off of the word "green", we would outlaw all racing and tractor pulls, etc. This includes street racing, which over 90% of us do daily going to work. We, the consumers, are the ones that are polluting the Earth.

Jul 22 10:57 AM