Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Solar Stocks Are Crashing While Oil Booms
Transcript
- Lucas: If you looked at energy markets this week and thought something felt broken, you're not wrong. We've got crude oil — WTI, specifically — up more than six and a half percent in the last five trading days. And at the same time, the solar ETF, ICLN, is down almost three percent. Enphase alone lost over eight percent. Luna: That's a pretty brutal divergence. Is it just the Iran situation driving oil, or is something specific hitting solar? Lucas: It's both, and the interesting part is that each story is almost a mirror image of the other. On the oil side, you've got the ongoing Strait of Hormuz tension — that 'toll' idea that Iran and some Gulf states have been floating. It's not even implemented, but the mere talk of it is adding a risk premium. Brent is sitting above 81 dollars, and WTI is just shy of 80. That's up from around 72 dollars just a couple of weeks ago. Luna: Right, and we did a whole episode on the Hormuz toll plan a few weeks back. It's real enough that traders are pricing it in. Lucas: Exactly. But on the solar side, the story is almost the opposite — it's about oversupply, not shortage. Europe has been flooded with cheap Chinese solar panels. The EU's own manufacturers are crying foul. And there's a glut in polysilicon, the raw material, that's driven module prices down something like 40 percent year-over-year. Luna: So cheap panels should be great for deployment, but terrible for the companies making them. That makes sense for Enphase and First Solar. Lucas: Right. First Solar is down eight percent in the same five-day window. And the irony is that actual solar installations are still growing — globally, we're on pace for another record year. But the margin compression is brutal. Investors are looking at earnings, not megawatts. Luna: Let's talk about that oil spike a bit more. Is this purely geopolitical, or are there fundamentals underneath it? Lucas: There are fundamentals. US crude inventories have been drawing down for several weeks — the EIA reported another draw last week. And OPEC+ is still holding back about two million barrels a day of spare capacity. So the market is tight even before you add a potential disruption in the Strait. Luna: And the IEA's peak oil demand forecast — does that factor into how traders are thinking? I know they recently pushed their peak oil demand estimate out to 2030. Lucas: It does, but in a perverse way. The peak oil narrative actually discourages long-term investment in new supply. If you're an oil company, why spend billions on a project that might not pay off before demand peaks? So you've got underinvestment even as current demand keeps growing. That's a recipe for price spikes. Luna: So the peak oil story might be real in the long run, but in the near term it's actually helping keep prices elevated. Lucas: Exactly. And the majors are leaning into it. Exxon is up four and a half percent this week. Chevron, almost five. ConocoPhillips, five. They're generating huge free cash flow and returning it to shareholders, not drilling more. That's the rational response to the uncertainty. Luna: Meanwhile, the solar names are getting punished. But is there a case that this sell-off is overdone? I mean, demand for solar isn't going away. Lucas: There is a case. The thing is, the sell-off is concentrated in the manufacturers and the inverter companies. The utilities that are actually building solar farms — NextEra Energy, for example — are only down about one percent. So the market is distinguishing between companies that make solar gear and companies that use it. Luna: That's a really important distinction. So if you believe in the renewable transition, maybe you want to own the developers, not the equipment makers. Lucas: Right. NextEra has a massive pipeline of solar and wind projects, and they're contracted at fixed prices. Their margin isn't squeezed by falling panel costs — it's improved. So the divergence within clean energy is almost as stark as the divergence between oil and solar. Luna: And what about the macro picture? We're seeing inflation come down — CPI ticked lower in June, core PCE seems to be stabilizing. Does that matter for these energy trades? Lucas: It matters a lot. Lower inflation means the Fed is less likely to keep rates high. That's good for growth, which is good for oil demand. But it's also good for long-duration assets like renewable projects, which are sensitive to discount rates. So falling inflation should, in theory, support solar stocks. But the glut story is overwhelming that right now. Luna: So we've got this weird moment where oil is spiking on supply fears, solar is crashing on supply gluts, and yet both are being shaped by the same underlying forces — geopolitics, energy transition, interest rates. Lucas: That's exactly right. And it's why this is such a fascinating time in energy. You've got two narratives that seem contradictory but are actually two sides of the same coin. The energy transition is real, but it's not linear. And oil isn't dead, but its future is contested. Luna: Let's zoom out a bit. Where do you see this divergence going over the next few months? Lucas: I think oil stays elevated as long as the Hormuz risk is in play — maybe 85 to 90 for Brent. But if there's no actual disruption, it could fade. For solar, the pain might continue until we see some capacity rationalization — smaller manufacturers going bankrupt, consolidation. That could take another quarter or two. Luna: So a classic commodity cycle. You need prices to fall enough to force supply out, then they recover. Lucas: Exactly. And the interesting twist is that, on the oil side, you could argue we've already had that supply rationalization — underinvestment for years. That's why oil prices are so sensitive to any geopolitical spark. Solar is earlier in that cycle. Luna: One thing I want to touch on before we wrap — the natural gas market. Henry Hub is basically flat this week, around 2.86. That's cheap by historical standards. Does that affect the calculus for solar at all? Lucas: It does, because cheap gas undercuts the economic case for new solar in some markets, especially in the US where gas-fired power is the main competitor. But solar is so cheap now that even with gas at two eighty, solar can compete in many regions. The bigger issue is grid interconnection and permitting, not the fuel price. Luna: Right. And we've talked before about how AI data centers are actually driving new gas demand. That's a whole other factor. Lucas: Yeah, and that demand is real. We did an episode on it. Data centers could add something like 20 billion cubic feet per day of gas demand by the end of the decade. That's a big number. But it's also a demand story for solar and wind, because tech companies want to be seen as green. So it's not either-or. Luna: Final thought — for the listener who's looking at their portfolio and seeing oil stocks up, solar stocks down, what's the takeaway? Lucas: I'd say don't confuse the stock price with the underlying trend. The energy transition is still happening. Solar installations are still growing. But the companies that make the hardware are in a brutal pricing war. If you want exposure to renewables, look at the utilities and the infrastructure players, not the manufacturers. And on oil, recognize that the current spike is real but fragile. It's driven by fear, not just fundamentals. Luna: Good way to put it. And speaking of things that are real but fragile — this show itself is only possible because of listeners who chip in a few bucks. If walking through the economy with us has made something click, you can support the show at buy me a coffee dot com slash fexingo. It genuinely makes a difference — keeps us ad-free and independent. Lucas: Yeah, it's not a big ask. A couple of dollars a month is all it takes. And it goes directly into keeping this podcast running. So if you've gotten something out of these episodes, consider it. Luna: Anyway, back to energy. Lucas, you mentioned that the oil spike might fade. What would be the trigger that breaks it? Lucas: The biggest trigger would be a diplomatic resolution on the Hormuz toll — if Iran and the Gulf states back down, or if there's a broader ceasefire in the region, you could see a sharp sell-off. Also, if OPEC+ decides to start releasing some of that spare capacity, that would cool things down. But neither seems imminent. Luna: So we're probably stuck with this divergence for a while. Thanks, Lucas. That's all for this episode of Energy Economics with Fexingo. We'll be back tomorrow with another angle. Lucas: See you then.