EC Calls for Coordinated Response to Rising Oil Prices

June 11, 2008 // Published as a news service by IHS

This communication will be presented for discussion at the European Council of Ministers meeting on June 19-20, in conjunction with the recent EC communication on rising food prices (see IP/08/763).

The EC's College of Commissioners analyzed both structural and cyclical factors and proposed coordinated reponse measures, including immediate, medium and long-term policy options.

Policy responses include:

• Stepping up the drive for energy efficiency in business and private households.
• A commitment to make proposals on the transparency of commercial oil stocks by the end of the year.
• Support for the organization of a global fuel summit between main producing and consuming countries to discuss a wide range of issues related to the balanced functioning of oil markets.

The EC agreed that European Union (EU) member states need to take short-term initiatives to support the most deprived sectors of the population. These measures should fit into a coordinated strategy and avoid distorting effects on the internal market or on fiscal and monetary policy.

"Rising fuel prices are squeezing the purchasing power of all EU citizens, with the strongest impact on the lowest-income families in Europe. I believe that through a structured response at the EU level - possibly combined with targeted social policy measures by member states - we can meet the challenge," said EC President José Manuel Barroso.

"At the heart of our approach is the full implementation of the EC's energy and climate change proposals, including increased energy diversification, security of energy supply and energy efficiency. We need to save energy, and to diversify the sources of supply. If we act swiftly and decisively, we can reduce the vulnerability of our citizens and our businesses, and support both our quality of life and our economic competitiveness," Barroso added.

Why have fuel prices risen?
In recent months, oil prices have experienced a sharp increase, reaching their highest level, in real terms, since the end of the 1970s. The College of Commissioners examined the reasons behind the recent surge in fuel prices, both within the EU and internationally, and concluded that it is largely the result of a major structural shift in oil supply and demand in the global economy, rather than a temporary phenomenon.

Without implementation of the policy agreed upon by the European Council of Ministers, EU energy demand will have to be met by fossil fuels, relying on an even greater share of imports. Consequently, import dependence would grow by 14% to reach 67% in 2030.

Other factors of a temporary nature have an impact, such as difficulties with specific pipelines and extraction capacity, the weakening of the dollar and inflows into commodity markets estimated at $70 billion in the first quarter of 2008.

Impacts on the EU economy
Energy and food prices account, on average, for about 10% and 20% of household spending, respectively. Increased oil prices create inflation in the EU. The contribution of energy inflation to the increase in the Harmonised Index of Consumer Prices (HICP) in the fourth quarter of 2007 averaged 0.8% in the euro area.This has a direct impact on households throughout the EU.

The rate of increase of liquid fuel prices for household purposes and for personal transport between April 2007 and April 2008 by far exceeded the overall HICP for the same period. The prices of liquid fuel for household purposes have risen by 35.2% and those for transport equipment by 12.7%, as opposed to the HICP average of 3.6%.

The EC's communication will also look at sector-specific effects of the oil price surge in the fisheries, agriculture, transport, chemicals, automobile and renewable energy sectors.

The policy response
The response of the EU to recent increases in oil prices should be based on the assumption that prices are likely to remain high in the medium to long term. This implies the need for structural adjustment, which needs to produce its positive effects as soon as possible.

At the same time, the short-term effects on some vulnerable groups should be mitigated, helping them to adjust to the new market situation. The major policy response must be to make the EU more efficient in the use of energy and less dependent on fossil fuels.

The College of Commissioners set out a series of immediate, medium- and long-term proposals to respond to increased oil prices. These proposals, to be formalized in the forthcoming communication will, inter alia, recommend to the European Council to:

• Confirm its determination to adopt legally binding measures to effect its 2020 targets for renewables, biofuels and reduction of greenhouse gas emissions by the end of 2008, which are essential to substantially improve energy efficiency and the diversification to the EU energy supply.
• Step up the drive for energy efficiency in business and in private households so that quicker and greater savings be achieved in line with agreed-upon objectives.
• Note that the EC will report on the functioning of the oil and petroleum markets in the forthcoming strategic energy review, and make proposals on the transparency of commercial oil stocks by the end of the year.
• Note that the EC will bring forward proposals this year to revise the energy taxation directive and the Eurovignette Directive, both of which will support the drive towards greater energy efficiency.
• Note the EC's intention to report, later this year, on the possible use of tax incentives, including reduced valued-added tax (VAT) rates to encourage energy savings.
• Support the organization of a global summit on oil markets between main oil producing and consuming countries, plus strengthen existing regional and bilateral dialogues in order to achieve better market access and transparency.
• Agree that EU member states could provide targeted support, when justified, to those households experiencing the most serious impact, while ensuring measures taken to alleviate the immediate impact of high oil prices are temporary, non-distorting and do not inhibit longer-term adjustment to higher prices.
• Agree to assist oil-importing developing countries to mitigate short-term impacts and to improve their energy efficiency and develop alternatives to fossil fuels through EU developments.

Source: European Commission.