Can Environmental Subsidies Impact Oil and Gas Prices in 2023?

More Electric Vehicles Means Less Oil

Some of the reasons people hesitate before buying an EV (Electric Vehicle) include the high purchase costs, the weak infrastructure for recharging, and limited ranges of the vehicles’ batteries. There have been considerable improvements in battery technology in the last ten years, which has enhanced their efficiency and lowered their prices. As to charging, the USA devoted $7.5 billion to the cause in their recent Infrastructure Investment and Jobs Act. Americans will also enjoy expanded tax credits for EVs, due to the (also recent) Inflation Reduction Act. When it comes to financial incentives, though, Europe and China have outdone the US. Back in 2020, for instance, the European Union (EU) gave over the largest portion of their stimulus funds (15%) of any section of the globe for this purpose.

The kinds of government policy initiatives to encourage EV adoption include sales incentives, bans on internal combustion engines, and sending funds over to developing the necessary infrastructure. Research indicates that these policies are the most crucial factors in triggering more widespread EV adoption. In China, for instance, aggressive government policies have set the country up to lead the world in terms of the pace of EV adoption in the medium and long-term. If we look back to the period between 2015 and 2018 in China, analysts believe that over half the EV sales owe themselves to government subsidies.

The question presents itself: How much of an effect can we expect government EV subsidies to impact oil and gas prices in the year ahead? As we’ve seen, these kinds of policies are key in driving EV adoption, but, in the event governments do decide to keep up the flow of subsidies, does this stand to significantly reduce oil demand and, with it, oil prices?

The facts and figures seem to indicate an answer in the affirmative because, as of December last year, over half the oil demand in the world came from the transportation sector. Recent years have certainly seen an upliftment of decarbonization in the lists of national agendas, and, with it, a quadrupling of EV sales between 2019 and 2021. The data shows it’s possible over half the passenger vehicles on the road by 2040 could be electric. This makes our question all the more pertinent.

As to natural gas, it’s heavily relied upon in Europe to generate the electricity needed for charging EVs, which opens the question of how much a surge in EV usage would potentially push up gas prices. Before we continue with this discussion, however, let’s speak a bit about crude oil.

Oil prices in First quarter of 2023

By the first week of January 2023, Brent crude oil futures had dropped all the way from about $125 a barrel in June, to less than $80 a barrel. Just in the first week of the year, oil prices slipped as much as 7.5%. Demand, which, of course, drives global crude oil investing, was at a low ebb as world economies were moving more slowly than usual. The IMF (International Monetary Fund) chief, Kristalina Georgieva, said, early in the new year, that one-third of the world economy will probably enter into a recession in 2023.

On top of this, a spike in Chinese corona cases raised questions about demand for the commodity in the near future. In 2022, high interest rates and the strong US dollar combined to drain the energy consumption of businesses all over the globe.

Crude Oil Trading

The question of how to invest in crude oil in India, France, China, the USA, or anywhere else, boils down to the preferred methods used in online trading. It’s possible to trade CFDs in the prices of energy equities, but also in ETFs (Exchange-Traded Funds) and crude oil futures. Crude oil is the most traded commodity of all and is famous for the volatility of its prices. For instance, in spite of the drop in oil prices mentioned above, the fact is that, as recently as March 2022, prices stood at over $100 a barrel, which was their highest in seven years.

One well-liked ETF that invests in crude oil futures is the Invesco DB Oil Fund. The Energy Select SPDR Fund is a popular ETF that tracks the energy stocks in the S&P 500 index. If you want your funds exposed to the biggest energy companies in the world, there is the iShares Global Energy ETF.

Catching Up with Gas

As of the first week of the year, European gas storehouses were as much as 83% full. Although early December brought chilly weather, demand in Europe was 11% below the five-year average. The first week of 2023 was the fourth straight week of losses for natural gas prices. Consumers enjoyed the relief to their heating costs.

Due to much-reduced flows from Russia, gas markets remain tight in terms of supply. “The fundamentals haven’t changed”, Graham Freedman of Wood Mackenzie reminds us, “We still have the rest of winter to get through and supply risks are still there”.

Fill Up or Charge Up?

Electricity prices in Europe have been insistently rising due the ongoing gas shortage. In September 2022, EU householders paid a massive 72% more for their power than the previous year. By contrast, and due to government subsidies, diesel prices have only gone up by 36%, and petrol prices by 15%. Nations in the EU paid out more than 27 billion euros last year in order to tame gasoline prices. As a result, in some places, gasoline retook levels last seen before the Ukraine invasion, or even dropped below them.

In such conditions, would it really be cheaper to charge up than to fill up one’s car, as one would normally think? Here, there’s a distinction to make. Those people charging their EVs at super-quick charging stations along the highway might indeed find they pay more to do this than to fill up with petrol or diesel. But the evidence suggests that charging up with a slower AC charger, using a subscription, costs a lot less than filling up. And 90% of EVs are charged with private chargers, often at home.

Researchers in the EU found that, in order to drive 100 km with an EV last September, you’d pay six-and-a-half euros, while covering that distance with a petrol-powered car cost as much as 80% more, and using a diesel-powered car would cost 50% more.

However, we also need to distinguish between EU nations. In Germany and Italy, where natural gas is relied on more than elsewhere for power production, the difference between the cost of a charge-up and a fill-up is minimal. Go to Spain, however, and you might save a huge 117% by choosing electricity over petrol. In Poland, the figure grows to 170%.

China Says “Enough is Enough”

Last year, if you bought an EV in China, you could count on a government subsidy to cover between 3% and 6% of the price. Makers of EVs and their batteries have been getting support from the government since 2009. Originally, the close of 2020 was supposed to bring an end to the subsidies, but, because of the pandemic, an extension was granted until the end of 2022. Now that the subsidies are history, EV makers feel pressure to hold prices low in order to keep sales high. In January 2023, Tesla, Xpeng, and SAIC-GM-Wuling refrained from increasing prices at all.

As to the anticipated effect of the withdrawal of subsidies, there will be “a transitional pain period” in the first two months of the year, says JP Morgan, with Chinese EV sales dropping as much as 40-60% compared with sales at the end of 2022. For this year as a whole, China’s Association of Automobile Manufacturers expects sales in China to robustly grow by 35% and account for one-third of total car sales.

The Road Ahead

Researchers say that the Ukraine crisis, which has tended to push up oil prices, is actually not likely to be a significant factor in sparking adoption of EVs. The generally sluggish economic climate, supply chain problems, and elevated electricity costs may interfere with people’s choices to go electric.

The Ukraine conflict has affected EVs in another way, though: Russia is a major source of nickel, which is needed for EV batteries, so Western sanctions on Russia have been a headwind in the challenge of lowering battery costs.

Looking ahead, government subsidies may be the most powerful force in spurring EV adoption. Since our cars account for the lion’s share of world oil demand, and with the costs of charging up (even at this point in time) proving much less than filling up, it’s very feasible that oil prices could be pushed down by government policy in this regard. In gas-reliant Europe, the attractions to going electric seem likely to pressure natural gas prices upward, especially as supply is tight in any case.