Energy in Europe

Issues and Policies

Thomas G. Weyman-Jones

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429560637
• Edition: 1
• Topic: Business
• Subtopic: Energy Industry
• Index: Business

Originally published in 1986. Energy economics emerged in the 1970s as one of the most controversial and critical aspects of European economic and political development. This book provides a fully comprehensive but easily accessible guide to the key issues of energy policy, placing them in a European context. As well as discussing oil price movements and their effects on European prosperity, it assesses the role of energy conservation and pricing policies. The chapters discuss the economic, political and social impact of nuclear power programmes, North Sea oil and gas discoveries, Soviet gas imports, and coal field closures, and go on to forecast possible future developments. This is for all those concerned with European and energy studies, especially political scientists, geographers, economists, and environmental and resource specialists.

1 Energy in Europe

An analytical framework

The two themes of this book: the European Economic Community (EEC) and energy, have each attracted considerable interest in their own right, and their conjunction has been the subject of much debate and policy analysis.

On the one hand, the EEC has come to be regarded as a powerful political and economic grouping on the world stage, containing as it does a large proportion of the world’s democracies and with a combined gross national product (GNP) approximately equal to that of the USA. On the other, energy economics emerged in the 1970s as absolutely critical in determining developments in the international economy, and particularly in western Europe where more than 40 per cent of the energy consumed is imported. Together with the USA (whose primary energy consumption is nearly twice as large as that of the EEC), the European economies have been ranged as large-scale oil consumers against the market power of the oil producers’ cartel formed by the Organization of Petroleum Exporting Countries (OPEC). Both these groups have, in turn, developed special political and economic interests with the third world, consisting largely of the non-oil developing countries (nodc’s). The latter have found themselves squeezed between the pincers of high oil prices and a burgeoning debt crisis.

It is important, however, to develop a consistent framework in which to analyse the issues and policies connected with energy in Europe, and two underlying characteristics of such a framework need to be emphasized.

The first is that the initial perceptions of the so-called energy crisis of the early 1970s were largely misplaced. They coincided with a widespread realization that the fossil fuels which largely dominate world energy consumption are finite resources, although there is no credible economic evidence that resource exhaustion forms a significant economic and technological constraint in the foreseeable future. Were this not the case, economics suggests that real resource prices net of extraction cost would be rising steadily through time at a rate approximately equal to the real rate of return on private sector capital investment as consumers competed for depleting exhaustible resources. There appears to be no observable evidence that this is, or has been, the case. Consequently, it is essential to distinguish between the idea that many fuels are exhaustible, and the apparent fact that fuel markets are not at present showing any signs that large-scale exhaustion is near.

Nevertheless, this idea alone persuaded many people that resource scarcity and the need to devote special efforts to energy conservation should be the overwhelmingly dominant characteristics of economic policy. A decade later it is clear that the preoccupation with the idea that energy was a special type of resource (essential but about to disappear) obscured much of the sensible and necessary economic and policy analysis of the events in fuel markets in the 1970s. While energy remains a specialized concept to the physicist, it is much more sensible for economic analysis to concentrate on the day-to-day market behaviour of individual fuels – treating these as any other scarce commodity demanded by consumers and industrialists. What is true is that the market responsiveness of energy consumers is spread out over considerable periods of time because any particular fuel type has to be used in conjunction with a specific type of capital asset or manufacturing process, and is therefore conditioned by long-term decisions to invest in or scrap the associated capital equipment. It is clear nevertheless that the ordinary economics of supply and demand is all that is required for developing the consistent framework to study energy in Europe.

The second characteristic of such a framework is that there is no reason to believe that it has a natural or comfortable European dimension. Although energy in Europe is the focus of attention here, it is not obvious that all the countries of Europe, or of the EEC, face the same fuel market problems, or have any agreed objectives to follow in fuel markets. It is not even clear that they have any common interest in fuel market resource allocation at all, other than the fact that there is an economic community in Europe which has been ‘shocked’ by events in oil markets that have had large-scale macroeconomic effects. The EEC consists of both fuel consumers and fuel suppliers. Its members have developed, over the years, commitments to different fuel types (e.g. nuclear electricity in France, nuclear energy and coal in Germany, coal and subsequently oil in the UK, natural gas in the Netherlands) and hence a desire to protect those industries and their employees from outside competition. Its members have a history of ties with different external fuel suppliers: e.g. France with Algeria, the UK with the Persian Gulf, and very different attitudes towards the link between foreign policy initiatives and fuel markets that emerged in the 1970s. France, for example, refused to join the Organization for Economic Cooperation and Development (OECD)-based International Energy Agency (IEA) although all the EEC countries were members, and the EEC has subsumed its oil stockpile policy into that of the IEA.

As a consequence of these facts, the joint theme, ‘energy in Europe’, is much better considered as the analysis of European fuel markets and the external shocks imposed on them. Policies are, and have been, naturally formed at the national level, and it will be surprising if there is ever any obvious Common Energy Policy (CEP) in the sense of a counterpart to the Common Agricultural Policy (CAP). Nevertheless both the IEA and more particularly the EC Commission have adopted policy statements and demand-supply projections that appear to have a common EEC basis, and it will be necessary to examine these. Such statements and projections can be thought of as energy economics commentaries, and in developing an analytical framework for energy in Europe, no profit is, at present, to be gained from looking further for a discernible CEP. The extent, and at the same time, the limitations of such a concept are clearly implicit in the following, slightly anguished comment from the 1985 Energy Commissioner, Mr Nicolas Mosar:¹

The point I wish to make is that there really is a Community energy policy, the key words of which are ‘coordination of Member States’ policies (energy objectives, energy pricing policy and crisis system for example), and reinforcement of national measures’ whenever necessary.

Given that fossil fuel exhaustion and an obvious and well-documented CEP are two of the misconceptions that a study of energy in Europe can do without, how is the necessary analytical framework to be developed?

Since the theme of energy in Europe is only a statistical and institutional artefact arising from the fact that EEC countries have experienced fuel market disruptions, it is perhaps wisest to begin with a statistical framework. This is provided by looking at a summary energy balance table for the EEC (table 1.1, page 10) which indicates (a) the sources of primary energy (i.e. fuels as raw materials) available to the EEC and (b) the different market sectors in which different types of secondary energy (i.e. fuel supplies after refining or transformation, transmission and distribution) are consumed. This statistical framework indicates the overwhelming significance of imported oil in the EEC’s fuel markets, and it is this unavoidable dependence on imported oil which has underlain most of the explicit policy actions by member states. In addition, the energy balance table highlights the role of the secondary energy supply industries for coal, gas, electricity and petroleum products. These industries are large scale and capital intensive but their commercial organization differs significantly across Europe. It includes the cartelized private sector suppliers of Germany, the integrated national energy undertakings in Italy, and the separate nationalized fuel supply industries in the UK. In one way or another, government control is a part of the industrial structure in these markets, and this continually raises a tension between the requirements of efficient fuel resource allocation, and the objectives of macroeconomic policy. Had the fuel markets been able to adjust to successive oil shocks without macroeconomic consequences, the energy crisis might not have been so celebrated, but the fuel market disruptions of the 1970s turned out to embody the largest macroeconomic shocks experienced by the European economies since the Second World War.

The macroeconomic impact of oil shocks is therefore the first substantive analytical issue that emerges from the statistical consideration of European energy markets. For convenience three oil shocks will be said to characterize the years 1973 to 1986:

First oil shock:	1973–4 OPEC real price rises for oil exports
Second oil shock:	1979–80 OPEC real price rises in the wake of the Iranian revolution
Third oil shock:	1982–6 erosion of the real oil price in world markets

However, it is doubtful whether the third is really a shock to the macroeconomic system rather than a delayed market response to the first two shocks. Since these were so large that fuel markets could not absorb them without large-scale impacts on the general price level, the rate of inflation and the levels of aggregate economic activity and employment, their final effect was partly determined by macroeconomic policy measures. These can be categorized in two ways. Since the general level of prices is affected there is an implicit policy response because the real value of fiscal and monetary policy instruments that are fixed in nominal or money terms will have changed: examples are the existing levels of tax allowances and any specific taxes such as those on motor spirit, and the level of the money supply in an economy. There may also be an explicit policy response, perhaps to offset the implicit effect, or to reinforce it if it favourably affects some other policy option. An example of the latter is that the second oil shock in the form of a higher price level actually deflated the European economies and this deflation was in some cases reinforced by active fiscal and monetary policy deflation to reduce further the rate of inflation. This was in strong contrast to the response to the first oil shock, which largely tried to offset its recession impact.

Since the importance of energy economics emerged first in the form of oil price rises, a second important analytical issue in the framework is the role of OPEC, and the attitudes of the EEC, individual member states, and other world energy market participants such as the IEA, USA and Japan towards OPEC’s use of its cartel power.

Three strands of opinion have emerged about the role of OPEC in world energy markets. The first is that OPEC – a collection of the principal oil exporters, numerically dominated by the Middle Eastern states, and dominated in terms of oil reserves by Saudi Arabia – can be regarded as just one more market cartel or collusive monopoly intent on the maximization of long-run profits, and, like most cartels, susceptible to internal economic conflicts which have possibly given it only a fairly short lease of life. Since the world oil market has exhibited many such examples of market power, this view of OPEC follows naturally from previous analyses. Although supported by many observers, it is fair to say that the leading proponent of this view has for a long time been Professor Morris Adelman of MIT. Adelman’s argument is essentially based on the methodology of positive economics: the predictions of the monopolistic theory are consistent with OPEC’s observed behaviour.

A second strand of opinion takes the position that even without OPEC, oil prices were set to rise because of the long-term expansion of energy demand observed in the 1960s and 1970s. Since this does not account solely for the observed fluctuations and the rapidity of price rises when they came, it is often combined with the view that OPEC itself, as an instrument rather than a cause of oil price rises, is not a cohesive cartel of like-minded profit maximizers, but consists of countries with differing objectives towards, and capacities for, rapid economic development. This has led to the development of quite complex models of OPEC behaviour although the success of their predictions is not clearly established.

A third view of OPEC, a development of the second, is that it is essentially a political rather than an economic grouping and, as such, foreign policy and diplomacy should be the key ingredients of energy policy. In particular this view focuses on the long-term political objectives of Saudi Arabia in order to explain its apparent willingness to accept reduced oil revenues in the early 1980s. The difficulty with this view is that it is designed to explain in retrospect all aspects of OPEC behaviour and hence is impossible to test by the usual procedure of confronting theoretical predictions with subsequent facts.

The oil shocks of the 1970s and 1980s turned out to have enormous impacts on the markets for other fuels, and on energy demand in general. Consequently, a third important analytical issue in the energy in Europe framework being set out here, is the development of Europe’s indigenous fuel production, its consumption of imports and its overall energy conservation. Once the considerable lags in market response had been worked through, the oil price rises, and the sympathetic rises in other fuels which accompanied them, were found to have a much greater effect on energy consumption than many economists h...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Notes on acronyms and abbreviations used in the book
• Figures and tables
• Preface
• 1 Energy in Europe
• 2 The oil shocks
• 3 Europe and the world oil market
• 4 Energy conservation and demand in the European Community
• 5 Investment in European fuel supply: policy issues
• 6 The evolving energy balances of the EEC
• Notes
• Appendix
• References
• Index