The price of oil has declined by roughly 66% in the past couple of years, and a lot of people want to know why: oil price last 5 years

Some people are saying that the recent trend of oil prices dropping means the global economy is consuming less oil and therefore economic leading indicators suggest financial collapse in the future.

They are wrong (today) because oil consumption has been increasing continuously over the last 20 years. historical oil consumption data recent history oil consumption

Other, more sensible ideas are that (today) oil prices have been decreasing because oil supply outpaces oil demand. But it hasn't been enough to compensate for the price drops. Its not like oil production has increased by 66%. At most, it has increased by 15%, more likely something like 10%.

production v consumption graph

So, prices have fallen faster than the production surplus have increased.

Could it be alternative energy technologies like solar (or fear of them on the part of oil producers) that are causing this additional decline in oil prices?

solar price per kwh solar price per kwh projections

TED talk that provoked this question: http://www.ted.com/talks/al_gore_the_case_for_optimism_on_climate_change

  • could someone please add the category "substitution" to this question
  • 4
    $\begingroup$ The effect of shifts in demand or supply on price is more complex than you seem to assume. It doesn't need a 66% increase in supply to produce a 66% fall in price with demand constant. Both demand and supply of oil are price-inelastic in the short run, so small shifts in demand or supply can produce much larger changes in price. $\endgroup$ Feb 23, 2016 at 9:58
  • $\begingroup$ Your graph shows oil driving renewables. In other words you proved that renewables require oil and are useless. $\endgroup$
    – D J Sims
    Jun 20, 2016 at 21:40
  • $\begingroup$ @DJSims Which graph? "Driving" renewables? $\endgroup$ Jun 22, 2016 at 21:24
  • $\begingroup$ All of them answer your questions and show that oil prices lead renewables prices $\endgroup$
    – D J Sims
    Jun 23, 2016 at 4:00

3 Answers 3


There are several reasons from supply and demand side. From production side, for example, contrary to anouncement of cutting production (from Saudi Arabia, Venezuela and Qatar), Saudi Arabia continued to increase its production. (There are some political reasons behind like Saudi Arabia would like to make some pressure on Russia and USA but I don't enter into this discussion as it does not concern an economic mechanism.)

Also, there are some other countries like Canada, Iraq and Iran where the oil production rises, which pushes prices to fall. (I think you can easily find some data about that, I have seen somewhere in web.)

From demand side, there is a risk of deflation in Europe and contraction of demand in most of developping countries, which also affects production side and could make a downward pressure on energy prices.

Another reason could be use of energy efficient technologies (like some cars or machines in some industries.)

What theory says about this issue ?

In fact, the existing literature on environmental economics says that price of exhaustible resources tends to increase as they become scarce. (it is the famous Hotelling rule)

There is a relationship between the use of renewable energies and exhaustible resources. Normally, an economy starts with use of exhaustible resources. Theory says that when economy grows in time, the exhaustible resource becomes scarce and its price increases. In this case, economy will use exhaustible resources until the marginal benefit from its use is equal to price of backstop (solar, wind etc...)

(A very interesting paper to see about subject is Withagen and Van der Ploeg (JEEM-2012))

In this current situation, it is sure that there are less incentives for economies to switch to clean technologies as price of exhaustible resources decreased to much.

To respond to your question, the use of renewable energy is increasing in world but I don't think at all that the huge fall in oil prices is due to "increasing" use of renewables. This trend for renewables is always present since some decades but until now, oil prices have always increased.

As I have tried to explain, I don't really think there are robust correlations between the drop of oil prices and renewable energy use.

  • $\begingroup$ Renewables dont work on a large scale. That is why they cannot replace oil. $\endgroup$
    – D J Sims
    Feb 23, 2016 at 0:57
  • 1
    $\begingroup$ Actual @DJSims this is not accurate. In fact, its recently been in the news that Chile is producing so much solar power that it is giving it away for free. Chile scaled TOO MUCH and the companies that were involved with its production are now victims of their own success. Is this just shill or what? $\endgroup$ Jun 22, 2016 at 21:32
  • $\begingroup$ No country produces more than a trivial fraction of its energy from renewables. $\endgroup$
    – D J Sims
    Jun 22, 2016 at 22:00
  • 3
    $\begingroup$ Norway: 98.5%. Costa Rica: 92.2%. Austria: 78.4%. New Zealand: 73%. Canada: 65%. Stick to your turntable, DJ. en.wikipedia.org/wiki/… $\endgroup$ Jun 22, 2016 at 23:16
  • $\begingroup$ Those aren't wind and solar $\endgroup$
    – D J Sims
    Jun 23, 2016 at 2:11

The oil price has fallen because production is very high, demand has not risen in line with production, and so the world's existing oil stores have filled.

Neither hydro, nor wind nor PV are substitutes for oil, so they can't directly drive down oil prices. To explain: hydro, wind and PV generate electricity; but very little oil is used to generate electricity.

Machines that do consume oil products - and these machines are predominantly vehicles - cannot just choose to use electricity instead of oil products. They require different engines.

In the long term (let's say the next 30 years), as vehicles get electrified and / or switch to cleaner fuels, renewables will make oil consumption obsolete. The first million electric vehicles took 30 years to sell. The next million vehicles will sell in 18 months. (source: Bloomberg New Energy Finance). But those long-term effects aren't priced into today's price of oil, because the oil that is stored, and being extracted today, will all have been burnt by then. If you want to see signs of the long-term effects, then you might find them in the share prices of oil, gas and coal producers, which are supposed to embody long-term information.

  • 2
    $\begingroup$ Wrong. Renewables dont generate net energy. $\endgroup$
    – D J Sims
    Jun 22, 2016 at 22:00

The tiny fraction of lower demand resulting from rooftop devices or even reverse metering, which produces a minuscule impact on generated power, that may have an effect. What has an effect is the perceived risk and its management at the investment and pricing levels. Therefore, not all the effects of senses of opportunity and risk will be visible in the data. In other words, the time shift between correlated features in the data do not always faithfully indicate causality.

What is a faithful predictor is a life long indication of value. Those that value money tend to have more. Therefore, the larger dollar shifts in investment and the larger artificially motivated price shifts will be, to a large degree, instigated by the wealthy.

What is their interest? Relatively safe return on investment.

If research into things like any of the technologies in this Energy Acquisition Tree is viable in the short term, investors have an opportunity to invest in the markets affected by research breakthroughs and the research to bring forth the breakthrough at appropriate times. This is how the oil industry was built. Research, infrastructure, and demand were manufactured concurrently through the following activities.

  • Exploration technology
  • Refinement technology
  • Distribution business
  • Marketing of high performance sports cars based on sexual appeal
  • Marketing of two car families based on feminism
  • Marketing of low efficiency family vehicles based on safety

Although the correlation is obvious in culture and in economic data during the last hundred years, the causality is not always clear. The cause was largely a set of conversations in golf carts and in investment banking board rooms about ROI capacity, which is high for fuel oils unless depletion becomes an issue. It will eventually, but the decisions were made with generations between the decision makers and the eventuality of resource depletion.

With solar, the case is different. The ROI is not nearly as immediate, but the longer term durability of the technology may be higher. Without an absolute assertion that it will be higher and a significantly longer term business vision, alternative energy is merely a speculative market and highly dependent upon political and military trends.

This may change if a few relatively probable events occur with substantiality.

  • Kazakhstan begins producing significantly
  • Deep off shore Brazil fields remain untappable without risking the entire Atlantic ecosystem
  • Domestic ecological movements throughout the most highly populated industrialized or industrializing countries threaten blowback scenarios for leaders that support coal powered plant construction
  • The Saudis are correct that their fields will effectively deplete in about 15 years

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