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The Oil Collapse and what it means for electricity

Does the price of oil affect electricity?

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The short, simple answer is “no”. In Ontario, we do not use oil to generate electricity. However, there are some valuable insights from the recent move in oil and interesting parallels between the oil futures market, and other commodities futures markets.

One of the most important factors that affect the North American economy has been ‘black gold’, or crude oil. The price swings wildly during some periods, and then trades relatively flat for long periods of time. This is evidenced by the extreme volatility in 2008 and 2009, and the relative calm between 2010 and mid-2014 where prices stayed in a tight range. This period of relative stability ended recently when Saudi Arabia refused to cut oil production, which resulted in the price moving violently from over $100/ barrel, to less than $50per barrel today. Oil plays an interesting role in international trade. The U.S. had been importing oil until the shale revolution saw them increase oil production and extraction more than any other country on earth, and these lower prices have both pro’s and con’s for the North American economy. For example, an oil driller will tell you how horrible low oil prices are on the Canadian and American economies. An SUV or pickup truck sales professional will tell you how amazing cheap gas is, and how everyone will have more cash in their pockets because they are spending less at the pumps.

Will my electricity price drop because of the lowering cost of Oil?

Let’s turn to a question that I have been getting asked very frequently from electricity buyers and other industry players. “Because oil has fallen by almost 50% in just a few months, does that mean my electricity price should go down as well”? Oil and electricity are often tied together because they are both considered ‘energy’. In Ontario, there is no electricity generation from oil. There are many less expensive and cleaner ways to generate electricity including renewables, natural gas, and coal. The places that do use diesel (an oil by-product) and liquid natural gas (LNG) to generate electricity are almost always islands, where they don’t have the infrastructure to import natural gas, and already have legacy infrastructure to burn diesel to generate electricity. Over time these islands will likely switch to other sources of electricity generation, but for now they might enjoy the relative discount they are receiving from low oil prices. Further, some places in Europe and Asia actually see the price of liquid natural gas (which is used to generate electricity) tied to the price of oil. This isn’t necessarily the best way to price the commodity; it is actually rooted in history, and simply hasn’t changed yet. But there are changes underway, Click Here to learn more.

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Here is an interview with the CEO of Canadian Solar (who is a big player on the Ontario Solar industry) and he is discussing how oil may affect electricity prices around the globe.

Despite oils dramatic fall from its perch of over $100/ barrel, the price of electricity in Ontario has held steady, because oil is not used to generate electricity in Ontario. Stay tuned for a future post on the #1 factor influencing the price of power in Ontario. *hint* It starts with a “W”.

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Jeremy PoteckWant to read more of Jeremy’s blogs: Click Here

  Want to hear more about Jeremy’s interview with Chris Beaver, contact him at:

jeremy.poteck@brucepower.com

or

416-867-2927 x4423

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