Will Europe’s Green Stimulus Affect The Prices Of Oil?

Let’s put the size of the oil market in perspective.

The world’s average daily production of oil is 80.6M barrels. Taking the most recent OPEC basket price of $43.12/barrel, that means the world spends close to $3.4B a day on petroleum, wholesale.

Naturally, once we consider the value of refined products, it goes up more. The annual crude oil market is in the neighborhood of $1.3T

In their rescue plan, the EU has committed to set aside 25% of the $825B to spend for renewables.

However, this budget won’t be spent in a year. Given the kind of projects being discussed, it’s likely that the “COVID rescue plan” will be spread out over the next five years.

The EU’s plan, therefore, implies $206B on renewable energy over the next couple of years.

Spent Correctly, the Money Could Impact Crude Prices

Since the beginning of the year, over three-quarters of the world’s new commitments on renewable spending has come from the EU.

The EU, on the other hand, is the third-largest consumer of petroleum, chiefly from Russia and Saudi Arabia. Clearly EU authorities are now willing to put funds behind the initiative of reducing carbon emissions.

But the key here is where the money is going, not just the quantity. Once the $825B rescue package had finally been agreed by the member governments, it almost immediately met a snag as a majority of EU Parliament members wanted to change where the money would be allocated.

Objections came from the Greens and other parties on the left, arguing that the rescue package wasn’t “forward-thinking” enough. Translated into plain English, it means they want more spending on green projects.

Price Depends on Demand, not Alternative Spending

Few of the initiatives being considered by the EU for investment contain significant, immediate reductions in demand for petroleum.

Somewhat ironically, some of the recent environmental moves have led to an increase in petroleum-based consumption. For example, Germany’s move to shutter nuclear plants. Coal stepped in to fill the gap, and now 44% of electric generation in Germany is from coal. 26% is from the “worst” kind of coal: lignite.

There isn’t enough renewable capacity to replace that, so Germany’s desire to close coal plants to decarbonize might be fueled by less polluting oil and potentially natural gas.

It’s the European Way

Europe has so far rejected including natural gas as a green(er) alternative open to subsidies, which means adoption has faltered compared to America. The US’ carbon emissions reductions have come from swapping out more polluting systems for cleaner natural gas.

The other issue is that the EU is focusing on hydrogen technology, instead of battery electric vehicles. In fact, Tesla had to scale back their new EV factory in Germany precisely because of environmental regulations.

Hydrogen is not as mature a technology as battery-electric, meaning that we are still years from mass production of consumer hydrogen vehicles.

In summary, EU spending might have had an impact on reducing demand for oil, but their choice of investments won’t have an effect for years to come.

In the meantime, European oil consumption is expected to actually increase, supporting higher prices in the future.