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Demand Destruction Will Decimate Oil Prices

The long-term ramifications of the…

Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Why Banning Fossil Fuel Investment Is A Huge Mistake

Activist global warming strategies have now caused the European Investment Bank to ban its fossil fuel project funding. After more than a year of internal and external lobbying by several EU member states and an ever-growing list of activist NGO and pressure groups, the EIB has decided to cut its financial support for all new fossil fuel projects by 2021. It will also support €1 trillion of investments in climate action and environmental sustainability. This is meant to force European countries to put an end to new gas-fueled power projects and keep in line with the Paris Agreements and EU CO2 emission targets. EIB VP Andrew McDowell stated to the press that the EIB’s new energy lending policy, seen as a landmark decision, has been approved with “overwhelming” support. He reiterated that it will bar investments or financing for most fossil fuel projects, including those that employ the traditional use of natural gas.

There is still a small loophole for fossil fuel projects, as the EIB funding will still be available for projects that can show they can produce one kilowatt-hour of energy while emitting less than 250g of carbon dioxide. New technologies could therefore be the savior in the end for traditional gas-burning power plants.

The significance of this decision by the EIB cannot be understated. As a major financial institution, a wide range of energy-related projects inside and outside of the EU, such as gas pipeline projects in Central Asia, Turkey and the recent discussions on East Med offshore gas projects, are now being endangered. While various Green Parties and environmental NGOs are celebrating this move as a major victory, it is a victory that comes with some real risks. The decision, which was largely inevitable after that EU finance ministers unanimously agreed to initiate stricter measures to combat climate change, will put more pressure on all parties to phase out gas, oil and coal projects.

Non-EU projects will be hit hardest, as they will have a much more difficult time trying to find enough lending support for new projects. EIB support has always been an important piece of the energy puzzle, with third parties using it as leverage to arrange finance consortia to start up new gas-related projects.

The decision by the EIB and the EU finance ministers is very much a political one, not based on real assessments of the overall energy market situation inside of the EU, or taking into account economic and geopolitical risks for the regions bordering the EU. Brussels has, for decades, been targeting a higher level of security of energy supply (mainly gas) in order to wean Europe off its Russian gas addiction. This strategy has been far from a success story, with European countries today seemingly more addicted than ever to Russian gas.

Official figures from EuroStat show that natural gas dependency in EU reached an all-time high of 77.9 % in 2018, up from 74.4 % in 2017. While core EU gas consumption is slightly down, imports will have to increase as European gas production is decreasing (Groningen, North Sea). To decrease dependency on Russia, other sources will be needed. Those new sources would normally be supported by the EIB, a support that is now coming to an end in 2021. Related: U.S. Natural Gas Production Has Hit An All Time High

At the same time, experts seem to agree that the best way to target lower CO2 emissions in the EU is to substitute oil and coal power generation in Eastern Europe with natural gas. At present these traditional power plants are struggling to find gas supplies. For a functional Paris Agreement strategy to be enacted, natural gas demand must increase. Additional transport infrastructure is also needed, but this decision by the EIB will also impact that.

Even in the most optimistic projections, renewable energy options, such as wind or solar, are not going to be able to counter the need for power generation capacity. If the EIB blocks a soft energy transition via natural gas, the Paris Agreement will almost certainly fail.

Another concern that the EIB seems not to have considered is that the removal of financial support for natural gas related projects in the Mediterranean or Central Asia/Caucasus will challenge the security of supply in the region. The EIB’s economic support has been crucial for key energy projects outside of Europe, not only supplying additional volumes to the EU but also increasing economic growth in politically fragile countries. Energy infrastructure connections also link regions, such as Algeria-EU, Azerbaijan-EU or East Med. Without these viable economic and strategic options available, Western Europe’s renewable energy sector will get maybe a boost, but the security, stability and security of energy supply to Eastern Europe and others will be threatened. The current European focus of energy producers in the Mediterranean and Central Asia can easily shift from West to East if incentives disappear. The EIB’s latest decision may appear sensible on the surface, but the geopolitical and economic fallout of this new policy will likely be disastrous.

By Cyril Widdershoven for Oilprice.com

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  • Mamdouh Salameh on November 17 2019 said:
    I have a number of adjectives to describe the European Investment Bank’s (EIB) decision to ban its fossil fuel funding from 2021. The most innocuous is ludicrous or the proverbial ‘cutting its nose to spite its face’ or disastrous. A mandated decision to ban financing of future energy projects won’t only undermine the security of energy supply for the European Union (EU) but will also pull the rug from under the EU’s energy diversification policy.

    This is a totally political decision. We must recall how environmental pressure on Norway’s sovereignty fund, the world’s largest with $1 trillion assets, forced the fund initially to decide to divest its portfolio of all oil and gas assets but the decision was reversed later when the economic realities in the market prevailed.

    Whilst the EIB’s decision is seen as a landslide victory for the EU States that have been lobbying for this decision, it could prove to be an empty one with huge repercussions for the energy supplies of the EU. This is a victory for Gazprom and Russia.

    Financing for the Southern Gas Corridor (SGC) gas pipeline which is intended to bring Caspian gas supplies to the EU to reduce the overwhelming dependence on Russian gas supplies will certainly suffer. Moreover, the East Med underwater gas pipeline which is supposed to bring gas supplies to the EU from the Eastern Mediterranean will never see the light of day because of cost and lack of enough supplies to fill it. Furthermore, the decision comes at a time of soaring EU gas demand and declining production from the North Sea and Groningen field in the Netherlands. Dutch regulators expect to completely shut down Groningen production by 2030. This in turn will create a significant supply gap within the European gas market.

    Decision makers around the world should heed three pivotal NOs before succumbing to pressure from environmental lobbying. There will be NO post-oil era, NO peak oil demand either throughout the 21st century and probably far beyond and NO imminent energy transition in the foreseeable future.

    In fact, the percentage of hydrocarbons in the world’s energy mix—coal, oil and natural gas—is still lingering around 85%, a figure that has changed little in 30 years. That remains so despite being challenged by serious environmental policies and despite a global expenditure of $ 3.0 trillion on renewable energy during the last decade. This is a hefty price to pay just to gain only a percentage point of market share from coal.

    And whilst wind and solar are being deployed quickly at an exponential rate, renewable energy installations are far too slow to catch the still-voracious appetite for fossil fuels. It is a fact needing acknowledgement in a world of over seven billion people, each of whom is wanting for more light, heat, mobility and gadgetry.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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