With record low crude oil prices, is it time to shelve those energy conversion projects?

When oil prices was over US$100 per barrel, everyone was looking for alternative to expensive energy prices from the Jamaica Public Service company. Many had chosen alternative sources of energy such as wind, solar and many have done upgrades to light and air conditioning system, all with the intent to reduce energy usage and cost overtime.

One important part of the consideration in trying to undertaken these projects were the financial benefits that would have accrued from making the investment, with many using the SPP or Simple Payback Period. Now these numbers would have been based on energy being at over US$100 per barrel and most investment would have been made if the payback period was 2 years or less. With oil price now at 50% of what it was at the start of this year, many people have been left wondering if they made a bad decision in investing thousands and in some cases millions of dollars, seeing that the savings now are only a fraction of what they had expected and their payback period is at least 1.5 times what it would have been with fuel being at the price is today and with some projecting it could remain low for another 18 -24 months.

Those who have not yet invested are considering postponing those expenditures as they projects are not looking as financially viable with crude oil prices at US$58 per barrel.

To these people I say, let’s take a different approach. I would say take that windfall you are now seeing from lower oil prices and invest those funds for as long as oil prices remain below the US$100 per barrel.

Once oil prices go back up, you use the funds generated from the investment of the savings to help offset the cost of alternative energy solutions , which would reduce amount of funds you would have had to make available for this capital investment.

eg.

Electricity Bill ( oil prices at US$100 per barrel)     $2,000,000

Current Bill ( with 15% reduction )                         $1,700,000

Savings ( will be move when full prices kick in)      $300,000

Estimated time oil prices will be low     18 – 24 months

Assuming savings above is average over this period

Total projected savings = $5.4m – $7.2m  or US $47K – US$62,608 if funds are not invested.

Total projected savings with funds invested.

Assuming interest rate 30 day using T-Bill 30 day rate of  6.7%  this would be $5.7m  to $7.7m  or US$49.6K to US$66.96K

Not bad considering this is all monies that one would have spent had oil prices been at prices it was at the start of the year.