High oil prices destroying European gas demand
High oil prices are destroying gas demand directly or indirectly, leading to
consumer outrage in Europe.
But not only might they be short-lived; but there are other, painless, ways
of reducing industrial and residential demand too.
"It would be futile for governments to use public money to offset
energy price rises." -- EC President Jose Manuel Barroso |
Although the European Union is trying to reduce its carbon emissions and
although its executive, the European Commission, is generally in favor of
markets to send price signals, its governments do not like the signals they
are receiving from hauliers, fishermen, and the public at large.
But European governments should be cautious about widespread tax breaks and
subsidies to offset the impact of record oil prices. (See chart: Dated Brent
crude: Jan 2 - Jul 8 2008).
"As for oil prices, immediate steps are justified to help the most
hard-pressed households, but it would be futile for governments to use
public money to offset energy price rises that are here most likely to
stay," the EC President Jose Manuel Barroso said June 18.
Barroso told the European Parliament in Strasbourg that the EC would present
proposals to increase transparency in emergency and commercial oil stocks
and design plans on taxation to support the transition to a "low carbon"
economy.
In its policy response to record energy prices published early June 2008,
the EC accepted that short-term, limited tax breaks should be considered by
member states to alleviate soaring energy costs for the poorest households.
But the EC urged "great care" over proposals to offset oil price increases
by tax cuts which could further inhibit a "necessary" reduction in energy
demand.
In the policy response, the EC urged European leaders to accelerate their
drive towards greater energy efficiency and to cut Europe's dependence on
imported, fossil fuels. (Listen to a related podcast: Consequences of rising
European gas prices.)
The EC sees these as key medium and long term steps to soften the impact of
sky-rocketing oil prices.
Some see oil prices weakening
Not everyone though sees oil prices as necessarily high forever.
Apart from anything else, they bring with them the risk of such huge demand
destruction that economies shrink, two consultants told a conference in
London organized by the Society of British Gas Industries on June 18.
According to the Center for Global Energy Studies, today's oil prices are a
blip, and not a long-term reality, because there has been no profound change
in market dynamics to suggest they can be sustained.
The chief economist for the Centre for Global Energy Studies Leo Drollas
said that today's price resulted from a demand surge that began in 2003 and
cuts in OPEC production over the past few years, which had been masked by
Angola joining OPEC.
But a permanent shift in the market was needed to prove that today's prices
are now at a sustained level, "and I do not believe that (has happened),"
Drollas said.
Drollas dismissed a number of commonly cited reasons for high prices,
including a weak dollar, and the "peak oil" argument, which says the world
is now more than halfway through the world's oil reserves.
He gave the example of the US: In the early 1970s the US' oil reserves were
put at 35 billion barrels, enough for 11 years' consumption at the
consumption rate at that time.
A similar reserves-production ratio emerged at the end of last year, too,
although then the reserves were down to 21 billion barrels.
But between those years, the country produced 90 billion barrels, Drollas
said.
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