Fact Checking: Correlations Between Solar Stocks and Oil

by: Bennington Investment Ideas

A lot of authors have been asserting that solar stocks offer a good way to play oil. In particular, this article cited

"At first glance, a relationship between FSLR and oil seems unlikely, since oil is used to make transportation fuels, while solar energy feeds into the electrical grid. The competition here is more about the potential future than the present – the more expensive oil becomes, the more likely that solar can be competitive in charging a growing hybrid fleet." - "CSX and First Solar Make Good Oil Plays" published March 14, 2011.

The article goes on to claim a correlation between First Solar, Inc. (NASDAQ:FSLR) and oil prices and gas prices. However, closer scrutiny suggests that this is just figurative math. Sure, you can draw a graph to show that oil prices have been rising and so have solar stocks over the last 8 months or so; however, analysis shows a different result.

I looked a couple energy commodity tracking ETFs for comparison:

  1. iPath S&P GSCI Crude Oil TR Index ETN (NYSEARCA:OIL)
  2. United States Oil ETF (NYSEARCA:USO)
  3. United States Natural Gas ETF (NYSEARCA:UNG)

I compared the monthly price returns of these stocks to FSLR over differnt historical time periods to produce the following results:

Correlation Between FSLR and Select Energy ETFs

Ticker 12 Month Correlation 24 Month Correlation 36 Month Correlation 45 Month Correlation
FSLR 100.0% 100.0% 100.0% 100.0%
UNG -3.8% 13.2% 10.8% 8.8%
OIL 54.6% 14.6% 34.3% 37.9%
USO 50.6% 14.8% 34.2% 38.3%

Source: Yahoo!Finance for monthly closing prices downloaded on March 14, 2011.

So the correlations for oil (OIL and USO) range from around 15% to 50% depending on time period selected with the peak correlation coming over a time frame that I think most people would reasonably consider too short. Natural gas, as tracked by UNG, shows an even worse correlation ranging from -4% to 13%. One would consider this to be great way to diversify a FSLR investment. So the first problem with the assertion that FSLR is a great oil play is that the math does not seem to hold together historically.

So while the analytics don't seem to support the argument, could it be a time period issue or the fact that historical results don't indicate the future?

The highest level thesis is that rising energy commodity prices should increase the attractiveness of solar stocks. This makes sense at the highest level. In absence of cost effective (or even remotely cost effective) utility scale storage, solar producers peaking power, i.e., daylight power. This is actually a pretty good thing. Alternative sources of power at that time typically include variations on gas fired generation, possibly diesel in some extreme cases and then coal, which is sometimes the price setting mechanism. Coal is usually not thought of as a peaking plant simply because it is slow to ramp up.

However, the cited reason is that solar power could eventually be used to energize batteries in hybrid/electric vehicles eventually displacing the need for gasoline produced from oil. This seems to have a few issues:

  1. Time frame - it will still take a while before hybrid cars represent a significant portion of the fleet such that their power consumption becomes meaningful.
  2. Charging location - If people charge their cars at home through plug in systems, this would not capture benefits from solar power since the charging would happen overnight. It is true that daytime charging stations could obviously benefit from solar power production.
  3. Technology - There is some discussion surrounding the use of trickle charging solar modules for cars to recharge their batteries or run cooling fans. While related, these are not focus markets for FSLR, which creates thin film solar modules. Furthermore for space constrained applications, thin film is typically less preferred than crystalline modules since it requires more surface area for the same amount of power production.
  4. Specific company risk - Selecting a single technology stock like FSLR creates risk associated with that specific company. If you like the thesis, a better approach would be to look at one of the ETFs: Claymore/MAC Global Solar Index (NYSEARCA:TAN) or Market Vectors Solar Energy ETF (NYSEARCA:KWT). Both TAN and KWT show approximately 60% correlations to OIL and USO over a 30 month period. Better than FSLR, but still quite low.


If you think oil prices are going to rise, probably the best play would be oil ETFs or perhaps high cost exploration and production companies or even any exploration and production company. All these investments provide direct exposure and some can provide leveraged exposure.

If you want to bet on electric vehicle technology, a good way could be to look at battery manufacturers. Breakthroughs in battery technology will be critical to reducing costs of electric/hybrid vehicles and increasing their utility. You could follow Warren Buffett and invest in BYD Company Ltd. (OTCPK:BYDDF).

If you are looking to invest in solar technology, more focused analysis around the industry and technologies would be the best approach. The industry is small but growing and often cited for its need for government support and regulation. One issue is that carbon is not priced into energy technology stocks. If so, solar would become more compelling. Furthermore, it is still a maturing technology that should eventually become cost competitive.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.I work in the renewable energy industry.