High oil prices: The EU’s response


As record-high fuel prices sparked protests across Europe in Spring 2008, the EU is preparing both long and short-term policy responses, including tax breaks for energy savings and increased transparency of oil inventories.

The continued rise in oil prices has affected Europe in a manner not seen since the oil shock of the 1970s. Prices reached new highs in 2008, with crude reaching a record $147 per barrel in July. Some analysts even predicted that prices could easily surpass the $200 mark in 2009 although that now seems increasingly unlikely due to the looming economic recession.

Protests against rising fuel prices took the EU by storm in June when fishermen staged blockades in France, Spain, Italy, Portugal and the UK (EURACTIV 02/06/08). Anger also spread to other sectors, including transport and agriculture. In France, thousands of demonstrating farmers blocked oil depots throughout the country. At the same time, dairy farmers in Germany went on strike, blaming rising fuel prices for pushing up their operating costs. They were followed by farmers in Austria, Denmark, the Netherlands and Belgium. Truck and taxi drivers also blocked the streets of London, Paris and Sofia in calls for government help. 

However, European governments are split on how to deal with the crisis. While protesters are demanding immediate tax breaks, some governments and consumer groups are concerned that they would simply lead to losses of public revenue and encourage those sectors to continue burning more fuel and damage the environment.

The European Commission initially resisted calls, led by French President Nicolas Sarkozy, to propose fiscal measures. But it finally bowed to pressure, presenting a wide series of taxation options for discussion at an EU summit on 19-20 June 2008. 

Follow-up proposals are expected before the end of the year.

Long-term measures first

The centrepiece of the EU's approach to tackling higher oil prices are long-term measures which the European Commission proposed in its climate change and energy package of January 2007 (see EURACTIV LinksDossier).

According to the EU executive, the response "should be based on the assumption that prices are likely to remain high in the medium to long-term". It therefore insisted that policy measures should "prepare EU economies to adapt to the new oil price environment" in the long term.

"At the heart of our approach is the full implementation of the Commission's energy and climate change proposals, including increased energy diversification, security of energy supply and energy efficiency," said Commission President José Manuel Barroso. "The major policy response must be to make the EU more efficient in the use of energy, and less dependent on fossil fuels," the EU executive said in a June statement. 

However, it also recognised that short-term measures needed to be taken "to cushion the short-term impacts of these adjustments on the most vulnerable in our society".

Adapting the EU's taxation policies

In a policy paper presented in June 2008, the Commission responded by pledging tax breaks to alleviate the short and long-term effects of fuel price rises on the poorest sectors of the EU population. The paper announced the following measures, to be taken later in 2008:

  • A revision of the energy taxation directive
  • A revision of the 'Eurovignette' directive, which allows EU countries to charge road users.
  • A report on the use of tax incentives  to encourage energy savings, including reduced VAT rates.

The EU executive also noted that some sectors of the economy are currently favoured over others, with fuels used in aviation and marine transport untaxed at present. However, it did not announce specific measures for these sectors for now.

'Targeted support' for fishermen and poor households 

Meanwhile, to address the most pressing issues, the Commission said it would allow EU countries to provide "targeted support" to poorer households, provided that the measures were "temporary, non-distorting and do not inhibit longer term adjustment to higher prices".

For the fishing industry, Commission President José Manuel Barroso proposed increasing the amount of direct aid the EU pays out to fishermen, on condition that this is accompanied by a reduction in fishing capacity (EURACTIV 18/06/08).

A 'Robin Hood' tax on oil firms?

Another idea, suggested by Italy's Finance Minister Giulio Tremonti, is to impose a tax on windfall profits accumulated by oil companies since prices started to soar.

The proposal was discussed by European heads of state and government during a June European summit in Brussels and backed by EU Taxation Commissioner László Kovács.

In an interview with EURACTIV Hungary, EU Taxation Commissioner László Kovács said such a tax could compensate the poorest segments of the population. But he stressed that this was only a recommendation, nothing mandatory, and that member states would remain free to decide how to use the additional revenues. The extra money could be used "for any kind of compensation, from social assistance to food subsidies," he said, adding that "the Commission does not give any recommendations on this". He further said  that one option was to use the extra cash to subsidise R&D into renewable energy sources and other long-term projects.

However, faced with numerous other proposals to address soaring oil prices, EU leaders were unable to agree on the way forward (EURACTIV 20/06/08).

Other ideas rejected: VAT and excise duty cuts

The Commission initially rejected calls by French President Nicolas Sarkozy to place a cap on fuel VAT for fishermen, saying that changes to taxation measures could start a "vicious circle", with other sectors demanding the same. It also said this would send the wrong signal to oil-producing countries, implying that EU states are willing to absorb higher prices by modifying their taxation schemes.

German Chancellor Angela Merkel and Swedish Prime Minister Fredrik Reinfeldt sided with the Commission in this debate. 

In the interview with EURACTIV Hungary, Commissioner Kovács dismissed a suggestion to cut excise duties on fuel as a way to lower fuel prices at the pump. "If the consumer does not have to face the effects of rising oil prices, it won't make him change his consumption habits and increase his savings instead […] It can result in possible tax incomes ending up in oil producing countries' budgets. And that is obviously not our goal." 

According to Commission estimates, the increase in average oil prices in 2008 from the previous year would translate into an increase of some €80 billion in the annual transfer of EU income to oil-producing countries.

Increasing transparency of oil stocks

Another aspect of the initiative is a Commission proposal to publish European oil stock inventories on a weekly basis in a bid to improve market transparency and prevent excessive speculation. The EU currently publishes oil inventories once a month, while the United States, Japan and South Korea already publish the information on a weekly basis. 

EU finance ministers backed the idea during a meeting on 8 July and the Commission is expected to come up with a proposal before the end of 2008. 

But industry insiders doubt the data would be meaningful and point out that the weekly US inventories are often unreliable. "The fact that information on oil stocks is published on a weekly basis in the USA does not provide any certainty to the markets," says Isabelle Muller, secretary general of Europia, the oil refiners' association. In fact, the opposite tends to happen because the reports on stocks are quite often inaccurate. This causes economic actors to make decisions on the basis of false information," she says.

One solution being considered at the Commission is to compile average figures for a given week. The EU executive is currently working on a feasibility study to compare costs and benefits of the system, Muller said.

Raising emergency oil stocks?

Earlier in April, the Commission launched a consultation on whether to raise emergency oil stocks to deal with potential supply crises. "Doubts about the availability of stocks in the context of an actual or potential crisis may lead to market speculation and increased price volatility," the EU executive said.

Many EU countries, especially in Eastern Europe, are ill-equipped to deal with potential crises. Under current rules, all countries are requested to hold 90 days worth of oil in order to cope with possible supply disruptions. But member states in Central and Eastern Europe, which joined the bloc in 2004, were granted a transitional period to comply with the rule.

According to the Commission, there is a need to clarify roles between the EU executive, member states and the Paris-based International Energy Agency (IEA). While the IEA foresees clear tasks in cases of supply disruption, nine EU countries (Bulgaria, Cyprus, Estonia, Latvia, Lithuania, Malta, Poland, Romania and Slovenia) are currently not members of the Paris-based agency, the Commission underlined. Poland has since joined the IEA.

According to the EU executive, such "confusion" on the distribution of roles may lead to delays in making emergency oil stocks available. "In three countries, all stocks are held by the government or an agency. In eight countries, all stocks are held by the oil companies, while the majority of member states have a mixed system," the Commission said.

In case of disruption, the overall level of stocks may also need to be raised, the EU executive added. "If the difference between the 'nominal' 90 days stocks and the really available level of stocks in a crisis is significant, the request of the Parliament to increase the stock obligation to 120 days might be a very reasonable proposal."

Diesel dependence and lack of refining capacity

Meanwhile, oil industry insiders are increasingly worried about diesel prices, which have now reached levels close to gasoline at the pump (around €1.4 in Italy, France and Germany in May 2008). 

According to the European Biodiesel Board, a trade association, "high diesel prices are the result not only of rising oil prices but also and especially of the extremely worrying continuous increase of the EU diesel deficit". Industry experts say the situation comes as a result of a lack of refining capacity in Europe as demand for cars and jet-fuel continues to grow.

As a result, the EU is importing growing amounts of diesel, mainly from Russia. "Last year [2007], we imported over 30 million tonnes of diesel from Russia," says the EBB, an amount equal to Germany's annual consumption, which the association says is "probably going rise to over 50 million tonnes in years to come".

And with a growing number of vehicles in Europe now sold with diesel engines, such dependency will only get worse, warns the EBB. Increasing dependence on Russia "constitutes an evident strategic weakness," it says. According to ACEA, the European car manufacturers association, diesel vehicles have already accounted for over 70% of new car registrations in countries like France, Belgium and Italy so far this year.

The Organisation of Petroleum Exporting Countries (OPEC) insists that there is sufficient oil on the market, claiming that price rises are unrelated to supply problems. Speaking at the World Petroleum Congress in June 2008, Abdalla Salem El-BadriOPEC's secretary general, said there was "no shortage of physical crude" and that stock levels were "comfortable". "Let us be clear about this. If more crude is needed, we will supply it. But what is the point of supplying more volume if it is not needed?"

Rather than supply problems, the organisation blames "speculation" on commodity markets. "This is evident in the fact that more than 70% of oil futures contracts on the NYMEX are currently held by speculators," El-Badri said, stating: "The problem is not volume. It is price." OPEC also blames geopolitical "complications" such as the conflict in Iraq, suggesting that oil-consuming countries should also build more refining capacity in order to prevent supply bottlenecks.

Speaking after an EU-OPEC meeting in June, French Ecology Minister Jean-Louis Borloo agreed with OPEC's analysis, saying he was "struck by the uncoupling" between supply and demand for oil and the "intense activity" around oil derivatives taking place on financial markets. "Today, there are 20 times more 'paper barrels' circulating than real barrels," Borloo pointed out. "The same observation can be made for all other commodities," he added, but this was particularly the case for energy and food.

Isabelle Mullersecretary general  of Europia, an organisation representing the oil refining and marketing industry, acknowledged that "the link between prices and speculation is one issue". But she rejected claims that refining capacity was insufficient in Europe, pointing to excessive investments which were made during the 1980s to cushion oil shocks. "Over the last 25 years, there have been, so to speak, no profits made in refining," Muller said in an interview with EURACTIV. "It is only recently that there have been decent margins for our industry."

Muller agrees that there is currently not enough diesel refining capacity in Europe, but said the deficit was mainly due to environmental regulations that are holding up investment. Meeting Europe's demand for diesel, she said, "could lead to an increase of up to 50% of our CO2 emissions compared to what we have today". And as emissions need to be reduced by at least 20% by 2020, she says this leaves little room to build extra refining capacity. "Our concern is that it is only in Europe that we have to pay for CO2 emissions and not elsewhere. It is a competitive disadvantage for Europe. As soon as we have global carbon prices, then there will be no disadvantage and decisions to invest in Europe or elsewhere will be even."

The European Biodiesel Board (EBB), a trade group representing fuel producers using vegetable oils such as rape seed, used frying oils and animal fats as feedstock, claim biodiesel is a "pragmatic and green solution to rising oil and diesel prices".

The EBB says biodiesel could provide "an immediately available solution to help bridge the EU's dependency on diesel" as more and more of it is now being imported into the bloc due to a lack of refining capacity. According to the EBB, developing the biodiesel sector "could play a pragmatic role in reducing retail diesel prices, as it may cover a large part of the marginal demand".

A group of eight trade associations, representing household consumer appliances such as low-energy light-bulbs and building insulation materials, have launched a joint campaign for energy-efficiency. "While global energy prices are not susceptible to harmonised European action, cutting overall costs by making better use of existing supplies is," the group wrote, noting the "enormous untapped potential" of existing technologies.

The group notes that the Commission's energy-efficiency action plan, adopted in 2006, estimated Europe's energy savings potential at more than 100 billion euros annually by 2020. "The price of a barrel of oil has more than doubled since then," they write, therefore "significantly increasing the savings potential of energy efficiency measures".

Lowering energy consumption in households and other sectors of the economy is therefore "the solution to high energy prices," the groups stressed. In a joint statement, they call on the Commission to:

  • Set a mandatory target for improving energy efficiency by 20% by 2020.
  • Increase incentives for energy efficiency investment.
  • Show greater commitment to enforcing existing legislation on energy efficiency.
  • July 2008: Oil prices reach $147 a barrel
  • 8 July 2008: EU finance ministers back proposal to publish data about oil stock availability on a weekly basis.
  • Nov. 2008: Oil prices bounce back above $50 after hitting their lowest levels in years due to the global economic recession.
  • 2009(?):  Commission proposal on oil stock transparency.
  • 2009(?): Commission to present 'Green Taxation package' of legislation including: 

    • A report on the use of tax incentives.
    • Reduced VAT rates to encourage energy savings.
    • A proposal to revise the energy taxation directive.
    • A revision of the 'Eurovignette' directive on road charging for lorries.

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