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Should Solar Stocks Trade on Oil Prices?

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If the solar index didn't mirror oil in the latter part of 2010, a case can be made for the correlation between the price of oil and the clean energy universe of stocks more broadly, as the chart above showing the links between the Wilderhill Clean Energy Index and the price of oil demonstrates.

The reality is that the economics of solar power don't have much in the way of a substantive connection to liquid transportation fuels. "If we're talking algae or ethanol, a higher price of oil helps, but for wind and solar, coal and natural gas pricing is more impactful," the Raymond James analyst said.

"Not only does oil not generate electricity, but you can use oil for lots of things that have nothing to do with solar, from transportation to killing mosquitoes," said Wunderlich analyst O'Neill. "Solar probably shouldn't trade like this, and I don't think it makes sense, but it's a real trade, even if the meaning behind it is that it is purely trading related," the analyst concluded.

On the other hand, given the prominence of the political events in Egypt and the Middle East, there's an argument to be made in favor of the alternative energy-oil trading link based on energy policy in the Middle East.

The speculative case for a changing approach to energy policy in the Middle East as a boon to solar and other renewable sources of energy was laid out in a research piece from Jefferies this week. What Jefferies argues has been "less obvious" in the recent energy headlines is that with potentially rising energy prices, and robust population and electricity demand growth, the longstanding regional government policy of subsidizing domestic energy prices may be unsustainable.

"We believe oil- and gas-producing nations are likely to deploy renewables and sell oil rather than burn it at subsidized prices for local energy generation, and this may accelerate with rising energy demand and prices," Jefferies' clean tech team wrote.

Taking Egypt as an example, Jefferies writes that energy prices are rising 4% to 5% annually, but are heavily subsidized by the government. Total subsidy comprised roughly 23% of Egypt's national budget in 2008, and was mostly energy-related, and is likely to be lowered in years ahead forcing energy prices higher.

Jefferies noted that the Minister for Trade and Industry in Egypt had said previous to the latest political unrest that reducing energy subsidies to certain energy intensive industries would save some £15 billion over three years. The energy subsidy is the largest item on a bigger subsidy bill of around $18 billion in Egypt. Wind, solar and natural gas vehicles are among the alternative energy and alternative transportation trends that Jefferies links to the debate surrounding fuel subsidies.

It's a debate that is not limited to the Middle East, either. Bolivia's President Eva Morales recently set off a political firestorm in his country when he proposed removing a huge subsidy for the purchase of gasoline.

More generally, the International Energy Agency highlighted worldwide fuel subsidies programs in a recent report, citing the subsidies as one of the biggest impediments to alternative energy adoption and calling for an end to the programs.

Indeed, the recent headlines involving the rising oil prices and the link to solar stocks don't just make for valuable CNBC slot filling fodder during market hours, but raise the question for investors, Should trading in solar stocks be directly linked to the price of oil?

Should trading in solar stocks be directly linked to the price of oil?


-- Written by Eric Rosenbaum from New York.


>To contact the writer of this article, click here: Eric Rosenbaum.

>To follow the writer on Twitter, go to Eric Rosenbaum.

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