For energy stock investors, the oil vs solar debate needs to consider changing technology, plus supply and demand.

Short of radical advances in solar-power technology, the long-term prospect for true “grid parity”—the price at which it will be equally cheap to produce a kilowatt-hour of electricity from solar as from fossil fuels—relies in large part on taxpayer subsidies. The prospect of higher oil and gas prices pushing up the cost of the electricity they produce is another factor.

When oil and natural gas prices fall, consumers are less likely to invest in solar power companies. Additionally, solar power also faces longer-term competition from nuclear power. In the debate over oil vs solar, where should investors put their focus? We break down some of the variables below.

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Oil vs solar: New technologies have revolutionized oil and gas extraction

New technology produces oil from shale, a form of rock. Oil-bearing shale deposits are common and widely spread out around the world.

That new technology still faces political and environmental obstacles. Costs, however, are likely to fall even more as the technology further develops. It’s just a matter of time before oil production from shale becomes common around the world. With oil production spread out rather than concentrated, oil prices will generally be lower and less volatile.

Solar power has attracted a lot of investment in recent years. That has quickly moved the technology forward. For example, advances in manufacturing techniques continue to steadily push down the prices of solar cells and solar panels.

At the same time, alternatives to costly silicon, which is currently used in most solar cells, are emerging.

Technological advances add considerably to the risk of solar-power companies that are solely focused on developing or making a single technology. That’s because they constantly risk being overtaken by competitors with a superior product. As well, customers may hold off purchasing their solar equipment if they believe a new technology is about to emerge.

Oil vs solar: How to invest in oil with safety in mind

If you want to invest in oil, consider oil stocks from top resource companies. They acquire a lasting competitive advantage by developing expertise in engineering, financial and political areas.

This expertise is another type of hidden asset. It doesn’t appear on the balance sheet, but it gives resource stocks an advantage in every project they undertake.

Resource companies do sometimes turn out to have hidden environmental liabilities, as do companies in other sectors. But the top resource stocks also create their own hidden assets. They accumulate rights to promising acreage long before the land rush starts. They have the technical and political skills they need to foresee and deal with environmental and political obstacles.

Oil vs solar: Why some investors like solar stocks

The reason why people invest in solar power companies is obvious—a pure source of clean, endlessly renewable energy that can replace fossil fuels like oil, coal and natural gas sounds like a great investment.

Solar power stocks are very tempting to environmentally minded investors. The idea of making money while helping the environment is noble, but it shouldn’t distract you from your core financial goals. After all, if you don’t care if you lose the money, you might as well donate it to an environmental charity and get a tax receipt for it.

Like many alternative energy sources, solar power has vast potential—but also risk to match:

● Reliance on government subsidies
● Competition from alternative power sources
● Rapidly changing technology

We recommend that investors take special care when investing in solar energy.

Oil vs solar: Recommendations for investors

Nobody has ever consistently predicted the rise and fall of the oil market. If you could do that, you could acquire a measurable proportion of all the money in the world. So our advice is to maintain some exposure to the oil industry as part of the Resources segment of your portfolio. But resist any urge to go overboard, particularly in high-risk oil investments such as junior oils, futures, options and so on. They can be risky and may fail to thrive in a slow oil recovery. Perhaps half the money you intend to invest in the Resources sector should go into oil and gas stocks.

As far as solar goes, we think you would be far better off investing in major companies with the research budgets to keep ahead of the competition and move quickly to embrace new technological developments.

Do you believe solar power will ever be consistently better investments than oil companies? Why?

What changes in the energy industry would it take for you to invest in a solar power company?