Will Rising Crude Prices Pull Solar’s Wagon? (XOM, CVX, COP, JASO, FSLR, SPWRA, TSL, JKS, LDK, DIG, TAN)January 31, 2011 by Douglas A. McIntyre
The price of a barrel of North Sea Brent crude broke through $100 this morning, while the price of a barrel of West Texas Intermediate is hovering around $90. Does that mean that alternative energy sources, particularly solar photovoltaic (solar PV) can expect to get a boost as a result?
Sadly, perhaps, the answer is most likely “no”. If anything, rising prices for crude could, in fact, put additional pressure on solar stocks. There are a number of reasons for this, but the most important is that the two energy sources are not switchable. The world needs liquid fuel, and that need will not be supplanted by solar PV panels or electric cars for decades. More immediately, though, higher oil prices seem always to cause investment in alternative energy to fall.
Big oil companies like Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP), have all recently announced substantial earnings and revenues growth due primarily to higher prices for crude. Expect calls for higher taxes on oil companies to follow soon.
But higher taxes on oil won’t reduce the price at the pump. Nor will installing more solar panels from the likes of JA Solar Holdings Co., Ltd. (NASDAQ: JASO), First Solar Inc. (NASDAQ: FSLR), SunPower Corp. (NASDAQ: SPWRA), Trina Solar Ltd. (NYSE: TSL), or LDK Solar Co., Ltd. (NYSE: LDK).
Solar PV makers have their own problems too. Expected over-capacity has kept share prices in check as solar makers are expected to compete on price.
High prices for oil may very well place additional weight on the solar makers. As consumers pay more for oil, they have less to spend on installing solar panels on their rooftops. Governments face the same problem, only on a larger scale. Every additional dollar that leaves a country to pay for oil is a dollar that cannot be spent on installing a utility-scale solar PV plant. The pressure on government investment in any form of alternative energy is profound, especially in these days of high deficits and fragile economies.
The place to look for the impact of high oil prices on solar makers is in new orders. If this analysis is even partially correct, orders should start to fall, perhaps as soon as the second quarter of this year. That will drive solar PV prices down even further.
Some ratings agencies have already begun downgrading solar stocks. JA solar was downgraded last week by one firm from ‘Buy’ to ‘Neutral’, and the share price target was cut from $8.40 to $7.00. Two weeks ago Sunpower was downgraded from ‘Hold’ to ‘Sell’ by another research firm.
First Solar, by contrast, recently had its ‘buy’ rating reiterated by Goldman Sachs, giving most stocks in the sector a little boost. And First Solar, currently the low-cost leader by virtue of its manufacturing process, might be able to hold onto its margins through 2011, even as supply grows and demand wanes.
Big oil stocks and solar PV stocks are up between 1.5% and 2.5% at around noon today. The ProShares Ultra Oil & Gas ETF (NYSE: DIG) is up nearly 4.5%, and the Guggenheim Solar ETF (NYSE: TAN) is up about 1%.