The Impact of High-Priced Oil on Solar Manufacturers

There are numerous reasons to be bullish on solar right now. Global warming and 5-6% average annual price declines per watt are often cited. These factors alone would make solar stocks a solid investment. Yet the potential for skyrocketing energy prices is the one factor that people often overlook. I've never even seen it mentioned in solar stock quarterly reports where grid parity goals are solely calculated based on in house cost cutting.

Peak oil is what makes the solar stocks an opportunity of a lifetime. For those unfamiliar with peak oil theory, Dr. M. King Hubbert famously predicted in 1956 that U.S. oil production would peak in 1970. His theory was that when half of any given location's reserves were extracted production would begin to fall at about 2% annually, which is the same rate production has typically increased at.

This theory can be applied to specific oil fields, countries, or the entire world. Oil giants today use Hubbert's formula to predict reserves and future production. Widely considered crazy at the time, consensus that the US had passed peak was not realized until several years after the fact. Hubbert similatenously predicted the world would peak around the year 2000. The astonishing thing about the world peak is that US production peaked approximately 30 years after discoveries peaked. World discoveries peaked just about 30 years ago.

So what is the best play on peak oil? Perhaps you should by shares in Exxon (XOM) since a 2% shortfall in oil production, for example, can lead to a 50% increase in prices. The problem is all the major oil conglomerates have already reported 3% annual production declines. Although price increases have more than compensated for this production falloff, they can't continue indefinitely. There will be a price level where consumers will be forced to conserve. Some believe this level can be $400/barrel or higher. Solar stocks are indeed the most highly leveraged to benefit from this trend. While big oil production is declining, First Solar (FSLR), SunTech Power (STP) and SunPower (SPWR) are all doubling annual production.

They will all benefit enormously from increased energy prices. Costs for solar panels will increase due to the energy expenditure required in the manufacturing process. But the value of the photovoltaics will increase much more. This is because energy accounts for about 15-20% of manufacturing costs but 100% of the value of the product. STP and SPWR both have 2 year return on energy investment for their monocrystaline modules. In other words, it takes 2 years of operation to recover the energy used in the manufacturing process. FSLR's product has only a 6 month return on energy invested. FSLR is therefore the most highly leveraged stock pick for $200+ oil. With by far the highest profit margins in the industry, the lowest capex/watt in the industry, and the shortest rollout time for new plants it's easy to see why FSLR is trading at such high multiples.

Disclosure: I am long FSLR STP and SPWR with my largest position being FSLR

Comments

[cjwirth]

The energy in solar panels actually accounts for more than 20% of the price when you consider that all of the the transportation of personnel and materials and mining. All of these processes use oil. Cliff Wirth peakoilassociates.com

[alpha24seven]

Peak oil and how it reflects the viability of solar panels?

Try again.

1) Peak oil is a sham. Do you trust oil companies? Then recognize who will -- profit -- most from all the scaremongering that flys around the bastion of truth known as the Internet regarding "peak oil".

2) Peak oil has been debunked for anyone that would like to actually check the facts.

a) Contrary to what all the "peakers" espouse, they ARE finding new and large deposits all the time. Do some research. This was/is an impossibility according to the peak oil experts and they simply refuse to recognize new and large reserves are constantly being found. Start here -- Cambodia. They also failed to recognize new technologies that would allow more oil to be extracted from each find and the reopening of old deposits.

b) Peak oil is fatally flawed because the premise is built on rewriting the second law of thermodynamics -- 100% efficiency. They state "it will take more energy units to get the oil out of the ground than the energy units (in oil) that come out of the ground. This is true. All forms of energy production are at a net loss. Ever hear of "perpetual motion" or "zero-point energy"? That is what you have if you use less energy to get more energy. Impossible.

c) It isn't about "energy units". It is about economics. If we need 100 units of cheap energy to develop one unit of energy with a higher value (both in energy density and financial terms) then guess what -- we spend the 100 units. Peak oil doesn't properly assess the economics of energy development.

d) Peak oil theory never accounted for massive technological advancement that will blunt to the point of a non-event the impact of supply constraint. They plot a parabolic ramp in consumption (which is also false) and never allow the introduction of technology breakthroughs to flatten their projections. There is no "shock value" in recognizing the entire picture.

I could go on but... Let's be honest, oil won't last forever, however the doom and gloom apocalyptic nonsense that peak oilers traffic in is patently false. Demand remains relatively flat and literally billion is being spent right now as we speak to develop and market new energy technologies. The "Mad Max" scenarios are complete BS.

[static66]

Alpha24seven or a Master Beta... Get the whole picture my friend, it really doesn't matter how much "new" oil is found or how much more we can suck out of existing fields, the big fields are going down fast
(Ghawar,Canterell etc) and you need to replace those fields plus add all your "new" fields at a pace that is just not possible.... that is only a part of the tragedy that is grinding it's way to you in Cambodia... we are in full scale population overshoot and our resources are not holding up to demand.... Most of our new "Global" economy is based on bullshit CDO's SIV's and Tranches that are basically worthless... the time to sit is coming and there are only a few seats.... they are in first class, everybody else ends up a loser.

[Mark Anthony]

Peak Oil is real and imminent. I am not going to argue about that. But it is a moot point that Peak Oil should support FSLR. Rapidly raising high energy price is actually a BAD NEWS for FSLR.

The point of the matter is FSLR's sales contracts have been fully booked for the next 5 years, and sale prices fixed and MUST go down 6.5% yearly. FSLR will NOT get a penny more in revenue due to demand increase, because it could not produce more than its capacity, nor could it sale for more per watt.

On the cost side, peak oil could only cause FSLR's cost going up rapidly, including raw material cost and manufacturing cost. With fixed sales price and raising cost, FSLR will soon be squeezed and its profit margin will turn negative. The more it pooduce and sell, the more money it will end up losing when the profit margin is negative.

[static66]

Andrew, you are a little misinformed on the implications of $400/bbl oil my friend. This economy, at least the people not working for Bear Stearns and Goldman Sachs will fold up like a beach chair at $150/bbl and will not recover in any way,shape or form. I am surprised that you think $400/bbl oil is even in the ballpark for anyone other than the ultra-rich for which they had best start hiding as the common-man will be coming for him and what he has.
You must be doing pretty well writing bullshit investment advice for the starry-eyed investors that don't see the coming oil shocks and the complete and total unraveling of the parlor games that wall-street has been playing..... The only thing you are long on is ignorance.

[Lou Grinzo]

Quick question: What percentage of US electricity is generated with oil?

Answer: According to the Dept. of Energy's Annual Energy Review, 1.5% for the most recent, full year. Higher oil prices will do more to push up the cost of solar than they will to increase the demand for solar panels, at least until we see a significant portion of our transportation fleet transitioned to electricity (EV's and plug-in hybrids).

[User 126691]

While I think that oil extraction will peak someday there is substantial reason to doubt it will occur before 2020. The most reputable geological organizations are not predicting a near term peak. The peak oil crowd is a mixed bag. Some of them are serious, however quite a few seem bent on looking like they are hankering after some quite odd conspiracy theories about secret plans to set up police states throughout the world and other things.

Oil prices will rise over time, however there will be some notable dips along they way. I

[User 126691]

While I think that oil extraction will peak someday there is substantial reason to doubt it will occur before 2020. The most reputable geological organizations are not predicting a near term peak. The peak oil crowd is a mixed bag. Some of them are serious, however quite a few seem bent on looking like they are hankering after some quite odd conspiracy theories about secret plans to set up police states throughout the world and other things.

Oil prices will rise over time, however there will be some notable dips along they way. I

[Andrew Ling]

Lou, although I disagree that high oil prices will do more to harm than help companies like STP and SPWR since they production costs are only about 20% energy. Remember, FSLR has a 6 month return on investment resulting in about 5% of it's costs from energy. In other words if oil and other energy costs double FSLR's costs will go up 5% but the value of their product would double. In theory their profit margin would go from 20% to 60%. This is what I mean when I say they are the most highly leveraged to benefit.

[Notconvinced]

Oil accounts for about 5% of electricity supply in OECD countries, far less than Coal (38%), Nuclear (23%), Natural Gas (19%) and even renewables including hydro (15%), according to the IEA. Most of the new capacity coming online over the next couple of years will be coal, gas, and nuke, futher diminishing oil's share of electricity generation over time. So why is peak oil relevant to solar demand? Please explain.

[techy]

It will take 4-5 year for peak oil effect to show up in the cost of energy.

before that there will be a global economy slowdown, which means reduction in oil consumption which means oil price will go down.

and you can add to that fact that most solar stocks are very expensive and they use material which is not abundant at current costs.

i see the probability of them going down 50% by end of next year. rather than they going more up.

[Andrew Ling]

techy, once the fact that we have peaked in world production becomes widely agreed upon speculators will drive oil prices up. It doesn't require waiting until there is an actual supply and demand imbalance. This is part of the reason oil is already trading at such "speculative"... levels. I've already considered economic slowdowns and conservation into my $200 oil assumptions. That's why I base my investments off of $200 oil and not $400 or $1000 oil. $200 oil is a level which the economy can bear, where conservation will still have very little effect on price. When Gas was on the rise at $2/gallon surveys were conducted to determine at what price consumers would begin to conserve. The consensus was $3. $3 has been reached and there has been little if any conservation. People are still purchasing pickup trucks that achieve 15 MPG. Using Europe as an example, price will probably not have any major impact on demand until $5-6/gallon or more. This translates to $200 oil. Basically oil will go as high as people are willing to pay.