Friday, May 15, 2009

Why Oil Prices Affect Renewable-Energy Stock Prices: Semantics

Renewable energy is used to generate electricity, while oil ends up as fuel. Only 1.7% of America's electricity comes from petroleum-fired power plants.

So one would think the price of oil would have no effect on the stock prices of renewable-energy companies.

But as this blog post in the New York Times points out:
...when oil prices go up, , nine times out of 10, clean-energy shares rise too, according to data from Bloomberg. It’s a long-standing correlation that has been something of a curiosity to analysts...
The post goes on to suggest a number of plausible reasons why this disconnect might occur. But here's one they missed:

It's all in the language.

We use "energy" as an umbrella term that covers oil and electricity. Investors think if one form of energy is becoming more expensive, then prospects for alternative sources must improve.

Which leads them to bid solar and wind company shares up.

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