European Affairs

Unable to bring its weight to bear in favor of peace in Palestine, because of Israeli and U.S. objections, the European Union knows it is at the mercy of a sudden §are-up in the Middle East crisis. During 2000, the prolonged rise in oil prices had significant repercussions on European growth and in§ation rates. More recently, in April, oil prices rose to $28 a barrel when Saddam Hussein decreed a halt in exports for a month in protest against Israeli military operations. Yet, Iraq is only a modest supplier to the European Union.

The risk is thus perceived as quite real, like a sword of Damocles hanging over the European Union's prosperity, its jobs and its social peace. Although European governments could have anticipated this situation, they failed to do so as a result of political weakness, as often happens in the European Union. There were plenty of warnings, such as those contained in a Green Paper published by the Commission at the end of 2000.

While Europe may be progressively building a single energy market (too slowly for free trade enthusiasts), it has actually done very little during the last few years to reduce its dependence on foreign supplies. Now that they have woken up to the danger, EU leaders in Barcelona asked the Commission to do something about it, in other words to submit proposals for action in the near future.

Loyola de Palacio, the Commissioner responsible for energy policy, and her Director-General François Lamoureux are putting the final touches to these proposals, drawing on the Green Paper. The Paper's pessimistic diagnosis, as well as the guidelines it suggested for remedying the situation, were not seriously disputed in widespread consultations conducted by the Commission with politicians and energy experts. First drafts of the new proposals are likely to be submitted to the leaders at their summit meeting in Seville in June.

But policy changes will upset vested interests and oblige governments to engage in politically sensitive debates - for example over the future of nuclear power. At the end of the day there will have to be trade-offs. There are growing signs of resistance, even inside the Commission. "When oil prices approach $30 a barrel, we are urged to accelerate our work; when they drop back toward $20 a barrel, we are asked to slow it down," says a senior Brussels official.

Some of the Commission's proposals will cause shivers in national capitals, which are used to running their own energy policies. But now that there is an EU Single Market, Mrs. de Palacio's aides point out, Europe's energy infrastructure is increasingly reaching across borders, making trade in energy easier. In those circumstances, they ask, "what sense does it make to manage stocks on a national basis, backed up by vague plans for cooperation in the International Energy Agency?"

Mrs. de Palacio wants a significant increase in EU strategic oil reserves (currently representing 90 days' consumption, compared to 120 days in the United States), and the formation of a gas reserve, which would first require a build-up in EU storage capacity. These stocks, she says, should be managed jointly. Centralized control of reserves would make it easier to deal with a sudden interruption of supply. Since there is often speculation in oil prices at times of international tension, central control would allow the Commission to exert pressure on the market to prevent, or at least to limit unjustified increases.

Such operations could be conducted progressively in cooperation with the producing countries. Cooperation on oil between the European Union and Russia, an increasingly important producer - a project dear to the hearts of Commission President Romano Prodi and President Vladimir Putin - is apparently progressing well.

But why not go further and look beyond Europe? The European Union has little or no contact with the Organization of Petroleum Exporting Countries (OPEC). The Commission would like to change this, and to persuade the member states to conduct a more intensive dialogue with all their suppliers. This could involve cooperating in market analysis, establishing independent price-setting mechanisms, and, in the end developing a coordinated price stabilization policy.

If the European Union embarked in this direction, it would mean freeing itself from the tutelage of the IEA, which has never favored such an approach. "Up to now," a Commission official says, "we have only proposed a dialogue to producer countries when prices are at their highest. This makes no sense. We must help them to stabilize their revenues. To move in this direction, the Union would have to be clear about the right price level. For the moment, the producers are thinking of $25 a barrel, and we are at $20 a barrel. This must be examined more closely and debated."

In the mind of its advocates, such a policy could lead to a proliferation of long term supply agreements between European oil companies and producer countries, with the blessing of governments. The Commission is interested in cooperating with oil producers wherever they might be located, including the countries of the Caspian basin.

In addition to price stabilization, which would benefit everyone, such cooperation could include investments in infrastructure, especially oil and gas pipelines. According to Brussels, the European Union is today much too dependent on maritime routes for the transport of its oil and gas. The possibility of a blockade of the Strait of Hormuz still causes as much anxiety as it did in the past.

Confronted with the geopolitical hazards of hydrocarbon-based supplies, the European Union has decided to give preference to renewable energy sources, which should account for 12 percent of EU consumption in 2010, as opposed to six percent today. Can such an ambitious goal be achieved? That is highly uncertain.

Electricity generated from renewable sources is expensive, and is not, anyway, free from environmental drawbacks. The "windmill farms" springing up in the windier regions of the European Union ruin the landscape and are starting to provoke protests from inhabitants of the affected areas that are almost as intense as those that used to greet the construction of nuclear power stations.

So, what about nuclear energy? Almost everywhere, anti-nuclear Green Parties, which represent an important sector of public opinion, carry considerable political weight. As a result, several member states, led by Germany, have formally decided to renounce nuclear power. In contrast, other countries, such as France and Finland, will soon decide on the investments necessary to replace their existing nuclear reactors.

Although prudently drafted, the Green Paper still points out the importance of nuclear power for meeting security of supply objectives. Above all, the paper concludes that there can be no substitute for nuclear energy if the European Union is to fulfill the commitments it accepted under the Kyoto Protocol to reduce greenhouse gas emissions.

What a dramatic dilemma for the environmentalists! "Governments dread opening up this dossier," says a senior official who is following the debate. "Even inside the Commission there is a refusal to look the issue in the face, as if there were a blocking minority preventing any forward movement. Yet, the European Union has obligations under the treaties, particularly the Euratom Treaty, and it must fulfill them.

"We must define a relatively coherent course of action, and, however reluctant some of the participants may be, there is no way of avoiding a debate on nuclear energy that will probably start before the end of this year. We must also tackle the most sensitive problem, that of nuclear waste."

The European Union has several cards to play if it wants to improve security of supply: strengthening its internal market, partnership with Russia and cooperation with the other producing countries, especially OPEC members. But the surest way to restrain the explosive growth of its dependence on external supplies would be to act on internal demand. The Commission should soon make proposals asking governments to give new impetus to energy conservation policies.

Much remains to be done. Above all, there must be a radical reorientation of distribution systems, which are today dangerously over-dependent on road transport. "In the United States, 40 percent of goods are transported by rail, against seven to eight percent in Europe," says Mr. Lamoureux. "This nonsensical priority accorded to road transport pointlessly increases our oil dependency."

Here, too, entrenched positions are hard to budge. Governments fear the reactions of truck drivers, who have shown they are capable of blocking roads and borders, creating economic paralysis and preventing people leaving on vacation. A few months ago, this political weakness led governments to reject a Commission proposal aiming to harmonize fuel taxes upward.

"The European Union must take its energy fate in its own hands," says the Green Paper. In these troubled times, nobody would dream of questioning the importance of what is at stake. It remains to be seen, however, how far governments will be ready to rise to the occasion and take the initiative.


This article was published in European Affairs: Volume number III, Issue number II in the Spring of 2002.