Last week I read a blog posting discussing the prospects for First Solar, a leading US-based producer of photovoltaic modules. Among other rationales for the firm's continued growth the author mentioned $100 oil. I can't find the link, and I don't mean to pick on that particular blog, because the view it expressed merely reflects the conventional wisdom that low oil prices held back the growth of renewables in the past, so high oil prices must be good for them. However, the underlying logic of this argument has been eroded by the changes of the last several decades, with the important exception of its lingering influence on government policy and public perception.

The problem starts with the notion of renewable energy as a replacement for oil. Other than biofuels like ethanol, most renewable energy technologies including wind, solar, and geothermal power generate electricity. In the US and most other developed countries, oil is no longer a major source of electricity. Between 1973, the year of the first oil crisis, and 2009 the share of petroleum and its products in electricity generation in the US declined from 17% to less than 1%, with much of the current remainder consisting of back-up power and generation at remote sites. That change happened pretty quietly, as oil was replaced by nuclear, coal and especially natural gas. The latter is important because the prices of oil and natural gas were historically linked, both by the ability of some customers to switch from one fuel to the other as prices shifted, and by the production of much US gas from oil fields. So when oil prices went up, gas followed and so did electricity prices.

One of the most remarkable developments in energy markets in the last few years has been the disconnection of US natural gas prices from oil prices, due in large part to rising shale gas production. From 1995-2005 the front-month natural gas contract on the New York Mercantile Exchange traded at an average of 80% of the futures price of West Texas Intermediate crude oil, on an energy-equivalent basis. But from 2006-2010 natural gas averaged just 49% of the oil price, while the average so far this year is a mere 28%. So when oil prices go up today, gas prices don't follow, nor should electricity prices. That means that higher oil prices no longer make electricity from renewable sources more competitive, in the way they formerly did.

Nor does much substitution between oil and electricity happen from the other direction, despite our renewed enthusiasm about electric cars. As of 2009, transportation accounted for 29% of total US energy consumption, yet only 0.3% of the energy used in transportation was in the form of electricity, including transmission and other losses, compared to 94% for petroleum products. So increasing the quantity of electricity generated from renewable sources won't mean noticeably less oil consumption, at least until there are many millions of electric vehicles on the road.

Then there's the phenomenon of "receding horizons" that became apparent as oil prices ran up from 2004-8. As the basic technology cost of renewable electricity generation from wind turbines and solar modules fell with wider deployment and continued R&D, the proportion of their installed cost attributable to raw materials, energy inputs, and construction costs rose. As oil prices went up, the cost of many of those inputs increased--just as we saw for the inputs to biofuels production--and construction costs went up due to competition with construction in other sectors, including mining and oil & gas exploration and production. That dynamic helps explain why renewables didn't instantly become cost-competitive when oil hit $145/bbl in 2008.

Even if the basis of the old conventional wisdom about high oil prices being good for renewables has faded, it's not entirely bad news for renewables, because energy policy has also become disconnected from oil prices. Energy policy is now driven more by concerns about climate change, green jobs and notions of energy independence than by any actual linkage between renewables and the uses of oil in our economy. High oil prices may ratchet up the political rhetoric in support of these policies, but they don't seem to result in the kind of practical actions that could directly address our most serious energy security concerns, which stem from our ongoing reliance on oil imports and have little or nothing to do with renewable electricity.

Wind and solar are also becoming more competitive in their own right, and manufacturers like First Solar see the necessity of being able to compete not just with conventional energy sources, but also without subsidies that look increasingly unsustainable in the fiscal environment that is likely to prevail for the foreseeable future. So even as sustained high oil prices would likely increase support for expanding renewables, they could also hasten the day when they must stand on their own.