I. Current Situation of Oil Price
The latest BBC NEWS reported that the price of Brent crude oil has fallen further below $50 to a six-year low. The price of a barrel of the North Sea benchmark dropped by 5.5% to $47.36, this is the lowest level since early 2009. US crude oil was also at its lowest level since that time, down by 5% to $45.90 a barrel.
However, the oil price won’t keep failing, throughout the history the oil price follows a golden rule: What goes down must come up. We can’t predict when the price rise and when the price down but the fact is that the price of oil will rise. What makes the oil price fluctuation? Here are several factors behind the fluctuation of international oil price.
II. Factors Influencing the Oil Price
1. Imbalance between supply and demand
The relation between the oil supply and demand in the international oil market is considered as the most direct and most obvious factor that affect the international oil price, and normally, imbalance of supply and demand would easily become the powder hose of big fluctuation of international oil price.
2. Dollar exchange rate
From 1974 on, dollar linked officially with oil and the most international oil trades is invoiced, delivered and settled in US dollar, thus, the fluctuation of dollar exchange rate not only has a direct impact on the stability of world’s economy and international oil price in petroleum industry, but also an important impact on the oil policies in oil exporting countries and oil consumption countries and the exploration and development of world’s oil.
3. The opportunistic practices in the futures market
Since November, 2003, the long opportunistic trades in the NYMEX are always bigger than the short, the speculative factors aggravate the growth of oil price. The report of CFTC on 7th, October, 2004 indicated that since the middle of September, the net-long position had increased by 24,000, which was in accordance with the growth of oil price, this suggests that the role, played by the opportunistic factors in the futures market, on driving the growth of oil price can not be underestimated.
III. Effects of Falling Oil Price on Biomass Energy
Some investors worry that falling oil prices will bring down demand for alternative energy sources such as biomass and clean energy. However, business leaders and experts in renewable energy say the impact of low oil prices is limited. Because oil and biomass do not directly compete with each other, oil is mainly used to make transport fuels. Biomass energy is mainly used to generate electricity.
1. Effects on the biomass pellets heating market
From this chart we can see that the correlation between crude prices and heating oil prices is very high. The heating oil prices are very close to the “indifference”point at which the cost of a unit of energy from heating oil is the same as the cost of a unit of energy from wood pellets. Also the red box assumes pellets selling at $230/ton with an energy density of 8,200 BTU/lb. States with high heating oil dependency and high use of wood pellet stoves are more likely to experience switching if pellet prices remain unchanged and heating oil prices fall far enough. But low oil prices are temporary. Over time, pellets for heating will remain the lowest cost fuel. And they are renewable, low carbon, and locally produced.
2. Effects on biomass pellets demand
In this chart the growth in pellet demand is related with heating oil price. If heating oil prices fall into the low $2/gallon range, then the cost of heating oil per MMBTU is on par with the cost of pellet fuel per MMBTU. That will slow the sales of pellet stoves and boilers, and homes already using pellets may switch back to heating oil. If this happens then demand may not exceed capacity and by mid-winter the pellet producers could be facing curtailments in production. However, if oil prices revert toward the long-term mean within the next year or so, there is the potential for significant excess demand in the 2015-16 heating season. The demand for premium wood pellets could exceed capacity in the northeast by more than 100,000 tons per year.
3. Effect on biomass fuel pellets production cost
Falling oil price makes the cost of pelleting go down too. From material transportation cost, there is a bright side for the pellet producers when crude oil prices are low. Diesel fuel prices will also fall and diesel cost makes up more than 50% of the total cost of delivered wood to the pellet mills. Thus the cost of delivered wood should fall. If wood prices fall as would be expected with persistent lower diesel fuel prices, then for a given pellet price, the producers’ margin per ton should improve. From diesel pellet mill owning cost, lower crude oil price means lower diesel oil price, cheap diesel fuel makes the diesel pellet machine owning cost lower which makes the diesel pellet mill more available. This is good news to pellet investors.
IV. Oil Heating Cost VS Pellet Heating Cost
The average family requires 50 to 150 million BTUs to heat a home for the winter, according to the Forests Products Laboratory. To compare costs for different types of heating fuels, it’s helpful to look past the cost per unit and consider cost-per-thousand BTUs of heat. A 2011 report by the U.S. Energy Information Administration found that pellets cost $19.43 per thousand BTUs, while oil was priced at $36.33 per thousand BTUs. Prices for pellet and oil heating vary by year and location, but in general, heating with pellets costs less than heating with oil.
I can just say there are opportunities and challenges at the turn of the century. The golden age of oil is over, like Iron Marshalthe won’t popular again. The new era is coming, oil dominance is threatened. Unlike before fluctuation, this drop is structural changes, German call it “Energiewende”, the switch from fossil fuel and nuclear to renewables. Technology is developing, anything will be replaced, the trend of this Energiewende is irreversible. Also biomass is renewable energy, China has now set goals to cap carbon emissions and coal use, and be 20 percent renewable by 2030 or earlier. Many other countries encourage renewable energy too, it will be a long-term development goals. So the cheap oil price can’t stop the biomass energy.