Faculty of law blogs / UNIVERSITY OF OXFORD

A Quantitative Study of Spillovers between Oil Price and Renewable Energy Sources Stock Prices: Lessons for Investors and Policymakers


Goran Dominioni
Graduate student at Yale Law School.
Alessandro Romano
Assistant Professor of Law at Bocconi University
Chiara Sotis
PhD candidate in Environmental Economics at the London School of Economics.

Meeting the growing global demand for energy is a crucial challenge of this century, as it poses severe climate and energy security-related risks. Investments in renewable energies, such as solar and wind, can mitigate the severity of these threats by reducing reliance on carbon-intensive energy and increasing the diversification of energy sources. Significant private funding is needed to sufficiently scale up investments in clean energy, especially in countries where action by the public sector is constrained by low fiscal capacity. In 2016 private finance accounted for about 90 percent of these investments worldwide, with public finance playing an enabling role. But private capitals can be attracted only if renewables are sufficiently profitable. The price of oil is a key determinant of the profitability of renewables. However, it is not clear how changes in oil prices affect the profitability of renewables. On the one hand, higher oil prices can increase the attractiveness of renewables by reducing their relative cost vis-à-vis oil. On the other hand, higher oil prices also increase the costs of producing renewable energy, since oil is still a key input in the production of renewable energies. A growing literature analyzes the relationship between oil and renewables, but it has produced mixed results. 

In a recent article, we use a novel methodology to study the relationship between oil prices and renewables stock prices between 2006 and 2016. Focusing on stock prices allows us to identify how changes in the price of oil influence the demand for investment in renewables. An important advantage of our analysis over most of the existing studies is that instead of considering renewables as a monolithic bloc, we divide them into three categories: Wind, Solar and Tech. The first two groups comprise companies that are active across the wind and the solar energy value chain. The third group is comprised of companies that are active across the advanced transportation, digital energy, energy efficiency and energy storage sectors. This allows us to study the spillovers between oil and each of these groups of companies and to study the interaction among different energy sources.

Our analysis reveals a number of interesting findings:  

  • The effect of changes in oil prices on the value of clean energy indexes is stronger than the effect of the latter on the former. This result is consistent with the idea that oil prices are still a key determinant of private investments in renewable energies.
  • Changes in oil prices affect different renewables in different ways. This confirms the importance of not treating renewables as a monolithic bloc.
  • The relationship between renewables and oil is characterized by two structural breaks (ie moments in which oil and renewables change the way in which they interact). As a consequence, the sign of the spillovers from oil to the renewables changes over time. For instance, between 2008 and 2012 an increase in oil prices generated a negative spillover on Solar, whereas after 2013 an increase in oil prices generates a positive spillover on Solar. Moreover, also the sign of the spillovers among renewables changes over time.  
  • The intensity of the spillovers among Tech, Solar, and Wind is lower in the period 2013 onwards. This finding suggests that the interdependence of different sectors in the renewable energy industry decreases as the industry expands.  

The Relevance of These Findings for Policymakers and Investors

Our analysis suggests that policymakers are, generally, not well-positioned to influence the sign of the spillovers emerging among the indexes. We find that structural breaks are very rare despite the myriad of policies related to renewable energies implemented between 2006 and 2016. This suggests that almost the totality of such policies did not change the kind of interaction among energy sources. As a consequence, instead of thinking about how to shape the interactions between oil and renewables, policymakers should learn how to exploit the existing spillovers. For instance, consider the case of Solar and Wind. Between 2008 and 2013 Solar and Wind were in a mutualistic relationship, and therefore each dollar spent subsidizing one energy source also generated a benefit for the other. In other words, the two subsidies enhanced their respective values. Instead, between 2006 and 2008 Solar and Wind were competing. For this reason, each dollar spent subsidizing Solar had a negative impact on Wind. Or, to put it differently, the subsidies to solar energy were neutralizing (at least in part) the impact of subsidies on wind energy. 

For investors, our results can inform hedging strategies, as the effectiveness of these strategies may depend on the spillovers among oil prices and renewables stock prices. In some periods, an increase in the value of one index reduces the value of the other index and vice-versa, which is compatible with hedging. Instead, in other periods, the decrease in value of one index also reduces the value of the other index, which is contrary to the idea of hedging. Note, however, that these spillovers are only one of the determinants of price variations, implying that this is only one of the factors that investors should take into account when implementing hedging strategies.

Goran Dominioni is a graduate student at Yale Law School.

Alessandro Romano is an SJD Candidate at Yale Law School.

Chiara Sotis is a PhD candidate in Environmental Economics at the London School of Economics.


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