Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Facing the challenge of higher oil prices
Date: 2008-06-13
Institutions: European Commission
Subjects: economic analysis, economic consequence, economic policy, petroleum, petroleum policy, price increase, price of energy

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 13.6.2008 
COM(2008) 384 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

Facing the challenge of higher oil prices 

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COMMUNICATION FROM THE COMMISSION 

of 13.6.2008 

TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN 
ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE 
REGIONS 

Facing the challenge of higher oil prices 

1. 

INTRODUCTION 

The  world  has  enjoyed  a  long  period  of  growth  in  the  past  decade.  Globalisation  and  the 
development  of  big  emerging  economies  like  China  and  India  have  helped  lift  millions  of 
people out of poverty and onto the road to prosperity. The EU has also benefitted, expanding 
markets for its goods and services and creating new jobs for Europeans. However, much of 
this  growth  has  been  built  on  the  assumption  that  the  raw  materials  needed  to  underpin 
increased  consumption  would  continue  to  be  easily  accessible  and  in  abundance.  It  is 
becoming increasingly obvious that many raw materials are not inexhaustible and the pressure 
of increased demand will drive up prices for those which are in scarce supply. This realisation 
has  been  brought  vividly  home  to  all  of  us  recently  as  food  and  oil  prices  have  escalated. 
While there is clearly a need for short term action by governments to cushion the impact on 
the most vulnerable parts of our society, there is also a clear need for a longer term shift to 
more  sustainable  ways  of  producing  and  consuming.  The  EU  has  been  at  the  forefront  of 
delivering  this  message  in  its  calls  for  action  to  combat  climate  change.  There  are  sound 
security, economic, social and environmental reasons for promoting greater energy efficiency 
together with the development of sustainable alternatives to fossil fuels. The purpose of this 
Communication  is  to  provide  a  basis  for  discussion  in  the  European  Council  and  with  the 
EU's  partners  and  stakeholders  on  how  we  can  adjust  to  living  with  higher  oil  prices  in  the 
coming years. There is a clear link between the analysis and recommendations set out in this 
paper and in the Commission's recent Communication on food prices1. Taken together, they 
offer a framework to help Member States cope with the immediate impact of dramatic price 
increases and medium/long term ways of adjusting to new resource constraints so as to turn 
challenges into opportunities. 

International  oil  prices  have  recently  reached  an  all-time  high.  Estimates  indicate  that  the 
current high oil prices will have long-term impacts, reducing growth and increasing inflation 
in the EU economy. Through higher input and transport costs, high fuel prices increase food 
prices. These high price levels are squeezing the purchasing power of all EU citizens, with the 
most severe impact on the lowest income families, and putting a strain on business. Energy 
intensive  sectors,  as  well  as  transport  and  agriculture,  and  in  particular  fisheries,  are  most 
affected and face a difficult adjustment process. Globally, higher oil prices imply a sizeable 
income  transfer  from  oil-consuming  to  oil-producing  countries,  and  this  from  the  EU  to  a 
small number of third countries. For example, the increase in average oil prices this year from 

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2007 levels would translate into an increase of some €80 billion  in the annual transfer of EU 
income to oil producing countries.  

Although  the  share  of  energy  costs  in  its  GDP  has  decreased,  the  EU  economy  is  more 
dependent on imported oil today than it was in 19952 and is thus more exposed to the impact 
of  price  changes.  When  price  spikes  occurred  in  the  past,  they  were  mostly  the  result  of 
temporary  factors:  this  time,  high  oil  prices  stem  from  a  structural  change  in  the  balance 
between  supply  and  demand  for  oil  in  the  global  economy  so  high  oil  prices  are  likely  to 
prevail in the medium to long run. 

The EU has anticipated this structural shift in its decisions to move towards energy saving, the 
development of renewables and becoming a low-carbon and highly energy efficient economy, 
less dependent on imported supplies. Taking decisive action now will enable the EU economy 
to maintain its competitiveness and flexibility in the globalised market for products, services 
and  commodities.  It  will  also  provide  opportunities  for  research,  innovation  and  investment 
that can be exploited by EU companies. 

The policy response to the current high oil price shock should therefore be one that facilitates 
these adjustments and prepares the EU economies to adapt to the new oil price environment. 
This process should be accompanied by effective measures to cushion the short term impacts 
of these adjustments on the most vulnerable in our society. However, we must also learn from 
the  mistakes  of  the  past  so  such  measures  should  be  targeted  and  avoid  creating  new 
distortionary  effects.  At  the  same  time,  the  security  of  the  EU's  energy  supply  must  be 
guaranteed  in  order  to  reduce  vulnerability  to  possible  further  price  fluctuations  on  the 
international market.  

2. 

THE OIL PRICE SPIKE 

In recent months, oil prices have experienced a sharp and abrupt increase, reaching their 
highest level, in real terms, since the end of the seventies. At the end of May, Brent crude oil 
was traded at around $132 per barrel, more than double the levels of a year ago. The average 
oil price for the first 5 months of 2008 stood at $105 compared to an average of around $73 
per  barrel  in  2007,  when  prices  had  already  tripled  compared  to  the  level  of  2002  ($25). 
Exchange  rates  movements,  and  in  particular  the  depreciation  of  the  dollar,  have  somewhat 
mitigated  the  impact  of  these  increases  on  the  EU  economy.  Nevertheless,  by  May  2008, 
prices in euro were 90% higher than at the beginning of 2007. 

Consumer fuel prices have been increasing sharply in the EU following the crude oil price 
trend.  Although  the  percentage  increase  is  smaller  for  consumer  prices  due  to  the  share  of 
taxation, average consumer prices in EU-27 have increased for petrol (Euro-super 95) by 6 %, 
for  diesel  by  14  %  and  for  heating  oil  by  17  %  since  the  beginning  of  the  year.  In  certain 
sectors such as marine fuel and fuel used for air transport, which are untaxed, the percentage 
increases have been higher.  

Coal and gas prices have followed, rising as fast as or faster than oil prices over the past 12 
months.  This  means  that  high  oil  prices  have  translated  into  high  energy  prices,  putting 
utilities around Europe under pressure to raise their prices.  

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In 2007, the EU's energy dependence rate for oil rose to 82.2% compared with 74.4% in 1995. Eurostat, 
Energy, transport and environment indicators, 2007 edition. 

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Current  real  price  levels  stand  above  the  peak  level  reached  in  the  early  1980s.  The 
evolution  of  crude  oil  prices3shows  that  high  prices  are  not  rare  occurrences.  However,  in 
2001, real prices, having remained at a constant level for more than a decade, began a steady 
upward movement, with a sharp acceleration in 2007. Analysts predict that prices may remain 
high or rise further in the coming months.  

3. 

3.1. 

WHY  HAVE  PRICES  INCREASED? A  COMPLEX  INTERPLAY  OF  DEMAND  AND  SUPPLY 
FACTORS 

The current surge in oil prices is largely the result of a major structural shift of 
oil supply and demand in the global economy.  

Constant or even slightly contracting oil supply is struggling to keep pace with rising global 
demand.  Previous  oil  price  shocks,  such  as  that  of  the  1970s,  had  been  induced  by  supply 
restrictions imposed by producing countries. This time a complex set of demand and supply 
factors is interplaying, pushing up prices.  

Oil  consumption  in  OECD  countries  is  declining.  Slower  economic  growth,  higher  prices 
and energy efficiency policies account for the decrease in demand from OECD countries since 
2005. The International Energy Agency expects this trend to continue in 2008.  

Demand growth in the rest of the world is led by emerging economies, in particular China 
and India. Net oil imports in these two countries combined are projected to increase from 5.4 
million  barrels/day  (mb/d)  in  2006  to  19.1  mb/d  in  2030  –  more  than  the  current  combined 
imports of the United States and Japan4. Demand is also rising fast in producing countries in 
the Middle East and in Asia. Non-OECD demand growth in 2008, stands at 3.7% or 1.4 mb/d. 
Economic growth and additional revenues from oil exports account for this increase. 

In  addition,  demand  in  many  countries  is  underpinned  by  existing  subsidies  for  fuels, 
designed to protect domestic consumers from soaring prices. They have high costs for public 
finances,  diverting  resources  from  longer  term  development  and  growth  policies.  Some 
countries  have  signalled  their  intention  to  discontinue  or  reduce  price  controls  or  subsidies 
(Malaysia, India, Indonesia, Taiwan and Thailand). For the time being China is maintaining 
price caps in order to limit inflation. 

Against  this  background,  oil  production  in  the  short  term  is  unlikely  to  keep  pace  with 
sustained strong demand.  

A wide range of constraints and uncertainties influence the extent and speed at which spare 
capacity can be put into production. Many existing oil fields have reached maturity, and have 
declining output capacity. The IEA  estimates that an additional 3 million barrels  per day of 
new supply are needed each year to offset the decline in existing supply. 

The  number  and  size  of  new  oilfields  is  shrinking.  Stable  low  prices  in  the  past  and 
uncertainty about the future level of demand have reduced exploration for new oilfields and 
limited investment in technology. Drilling new oil fields and putting them into production is 
costly and requires a long lead-time. The cost of developing an oil field today is twice as high 

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The OPEC basket, which is very close to the EU 27 crude oil supply cost.  
International Energy Agency, World Energy Outlook 2007. 

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as three years ago. Much of the potential new fields are in "unconventional deposits", in areas 
difficult  to  reach,  such  as  tar  sands  or  oil  shale.  High  extraction  taxes  imposed  by  some 
producing  countries  can  also  become  a  disincentive  for  new  upstream  investments.  In  other 
words, higher prices are today required to support development of new supplies. In addition to 
cost  considerations,  exploitation  of  "unconventional  deposits"  would  have  highly  negative 
environmental  impacts,  including  higher  green-house  gas  emissions  compared  with 
conventional sources. A further complication is the shortage of equipment and personnel with 
the necessary technological qualification and engineering skills to work on new explorations. 

The  largest  potential  for  further  oil  production  expansion  is  concentrated  in  the  Middle 
East and OPEC countries, where state-run companies dominate extraction and production. 
Nationalised  companies  are  less  responsive  to  market  forces  and  less  ready  to  invest  in 
technology  advances.  OPEC  has  maintained  a  very  cautious  policy  with  regard  to  possible 
expansion  of  crude  oil  supply  and  devoting  major  investments  to  increase  production 
capacity. 

Refinery  bottlenecks  and  capacity  constraints  have  also  negatively  influenced  level  of 
supply. Global refinery capacity has not increased in recent years, as it was not considered a 
viable investment when oil prices were low. In addition, the costs of building new plants have 
surged.  Recent  refinery  problems,  following  the  damage  caused  by  hurricanes  Katrina  and 
Rita in the US and in the Gulf of Mexico, have further reduced output capacity. In Europe, 
while overall capacity is satisfactory, refineries are not equipped to process certain fuel types 
in sufficient quantities, i.e. diesel, which leaves Europe dependent on the US for the off-take 
of  its  surplus  gasoline  while  relying  on  Russia  for  supplies  to  make  up  the  shortfall  in 
European diesel production.  

3.2. 

Some other factors of a temporary nature have accentuated the price trend  

Several  factors  make  full  production  in  some  areas  of  the  world  difficult  –  these  include 
intermittent sabotage of pipelines or the threat posed by armed conflicts in Nigeria and Iraq, 
bad weather disruption of extraction capacity in the Gulf of Mexico and security concerns in 
the wider Persian Gulf area.  

The weakening of the dollar has contributed to pressure on oil prices, as investing in oil has 
been  seen  as  a  valuable  hedge  against  further  depreciation  of  the  currency  and  resurgent 
inflation. 

In the same way as in other commodity markets, fresh capital has been injected into global 
oil  markets  by  investors  seeking  alternatives  at  a  time  of  turmoil  in  financial  markets. 
Inflows  into  commodity  markets  were  estimated  at  $70  billion  in  the  first  quarter  of  2008, 
implying  a  surge  in  a  trend  that  has  been  evident  for  several  years.  However,  the  level  of 
influence of increased activity from non commercial investors on oil prices is unclear at this 
stage. There are some indications that linkages between the forward and spot markets have led 
to recent increased short term price volatility, although there is a need for further analysis of 
these developments.  

3.3. 

In terms of outlook, the rise in oil prices is part of a structural shift, rather than 
a temporary phenomenon.  

The International Energy Agency's 2007 World Energy Outlook drew attention to increasing 
demand  for  energy  supplies  from  non-OECD  countries,  particularly  China  and  India,  and 
predicted that, under current energy policies, global energy demand could be 50% higher in 

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2030 than in 2007, with fossil fuels continuing to dominate the fuel mix and accounting for 
84% of the overall increase in demand in primary energy between 2005 and 2030. Although 
world  oil  resources  are  expected  to  meet  the  demand  growth,  this  assumes  adequate 
investment  to  deal  with  under-capacity  across  the  oil  value  chain  and  implies  a  more 
concentrated share in output from OPEC countries. Spare capacity is expected to remain low. 

Unless the policy shift decided by the European Council is implemented, growing EU energy 
needs  will  continue  to  be  met  by  fossil  fuels,  relying  on  an  even  greater  share  of  imports. 
European  Commission  baseline  scenarios5  for  2030  foresee  that  total  EU-27  energy 
requirements would be 11% higher in 2030 than in 2005, despite a moderate improvement in 
the  overall  energy  intensity  of  EU  economies6.  Oil  would  remain  the  most  important  fuel, 
although its consumption in 2030 would exceed current levels only by 6%. The share of fossil 
fuels in total energy consumption would fall only marginally by 2030, as the net result of a 
limited decrease in the use of solid and oil fuels and an increase in the use of natural gas, the 
demand for which is expected to expand considerably up to 2030.  

Without  implementation  of  the  European  Council  decisions,  the  share  of  renewables  in 
primary energy consumption is projected to reach only 12% in 2030. This would cover nearly 
60% of the primary energy consumption increase of some 200 million tonnes of oil equivalent 
between 2005 and 2030 but would obviously fall short of reaching the target of 20% of final 
energy  consumption  set  for  2020  unless  the  agreed  additional  measures  are  taken.  Without 
new  investment  decisions,  the  share  of  nuclear  in  total  energy  consumption  would  drop 
slightly, from 14% in 2005 to only 10% in 2030. Overall, without the impetus of new policy 
decisions, the share of indigenous and carbon free energy sources would rise marginally, from 
21% in 2005 to 22% in 2030. Consequently, import dependence would grow by 14 percentage 
points,  to  reach  67%  in  2030.  Europe  would  be  dependent  on  imports  for  95%  of  its  oil 
consumption. Likewise, gas imports would rise to 84% from their present level of 58%. Under 
this  scenario  of  just  projecting  current  trends  without  factoring  in  the  decisions  of  the 
European  Council,  EU-27  energy  related  CO2  emissions  would  increase  significantly, 
exceeding  the  1990  level  by  5.1%  in  2020  and  by  5.4%  in  2030.  These  projections  clearly 
show  the  need  for  rapid  decision  and  implementation  of  the  2020  targets  agreed  by  the 
European Council. 

4. 

IMPACTS ON THE EU ECONOMY 

4.1. 

Inflation 

Increased oil prices create inflation in the EU. Recent increases in inflation have been due in 
large part to higher energy and food prices, which account on average for about 10% and 20% 
of household spending, respectively. 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. Similarly, the prices of a number of agricultural products, such as wheat, dairy 
products and meat, have soared. Within the EU, there are, however, sizeable differences in the 
contribution  of  food  and  energy  prices  to  overall  inflation,  due  to  variations  in  the  relative 
percentages of overall household expenditure on food and energy and the existence in some 

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European Commission, European Energy and Transport, Trends to 2030 – update 2007. 
This  corresponds  to  a  20.5%  increase  in  final  energy  consumption,  in  particular  for  transport  and 
industry needs. Household energy demand is expected to rise only by 12%, following demographic and 
lifestyle changes. 

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countries of administered prices for liquid fuels and electricity. The degree of competition on 
energy markets can also influence price developments in individual countries.  Estimates for 
the larger euro zone countries show that the direct effect of a € 10 increase  in oil prices would 
be an increase in inflation of about 0.6 to 0.8 percentage points during the first year after the 
increase. 

Overall,  oil  prices  are  likely  to  stay  high  in  the  long  term.  Poorer  households,  for  whom 
energy and food represent a larger share of spending, will be most affected. 

4.2. 

Effects on households 

Energy  costs  make  up  a  substantial  part  of  household  budgets  and  this  trend  is  expected  to 
increase in the future. This means that Europeans will need to allocate additional funds to pay 
their energy bills. The rate of increase of prices of liquid fuels for household purposes and for 
personal  transport  between  April  2007  and  April  2008  exceeded  by  far  the  overall 
Harmonised  Index  of  Consumer  Prices  (HICP)  for  the  same  period.  At  the  European  level, 
HICP have risen by 3.6%, the prices of liquid fuel for household purposes by 35.2% and those 
of  fuel  for  transport  equipment  by  12.7%.  However,  fuel  price  increases  affect  individual 
Member  States  to  different  degrees.  The  highest  rate  was  reported  for  the  United  Kingdom 
(69.1%). For a number of Member States (Belgium, Germany, Greece, France, Luxembourg, 
Finland), the rates of growth exceeded the European average. 

The  rates  of  growth  of  prices  for  fuels  for  individual  transport  purposes  were  much  more 
convergent,  between  the  highest  in  Estonia  (25.1%)  and  the  lowest  in  Slovenia  (4.8%).  In 
addition, there is a knock-on effect on other significant items in the household budget such as 
expenditure on transported goods. 

4.3. 

Sector-specific effects of the oil price surge 

In the fisheries sector, at current price levels, fuel costs are estimated to be more than €2.4 
billion  per  year,  or  more  than  30%  of  the  value  of  EU  fish  landings.  Some  operators, 
especially  trawlers,  are  the  hardest  hit  as  fuel  costs  can  represent  up  to  50%  of  income.  In 
contrast,  in  recent  years,  fish  prices  have  stagnated  or  even  decreased.  Consequently,  at 
current  fuel  prices,  the  trawler  industry  segments  are  loss-making  or  only  marginally 
profitable.  For  the  fishing  industry,  the  increased  external  economic  pressure  of  fuel  price 
increases  adds  to  existing  pressures  from  fleet  overcapacity  and  an  eroded  resource  base 
caused by overfishing. 

High oil prices may have a significant impact on the profitability and competitiveness of the 
agricultural sector. The impact on family farm income will vary across EU Member States, 
depending not only on the cost structure, but also on the profitability of the agricultural sector. 
The share of costs directly influenced by oil prices (fuel, fertilizers and crop protection) in the 
total farm costs varies considerably according to the type of farming.  

Oil  continues  to  dominate  the  transport  sector,  where  it  accounts  for  97%  of  energy 
consumption. Transport costs for industry may range from 1% to 10% of final product value. 
Households spend 13.6% of their total final consumption on transport. Therefore, a doubling 
of  crude  prices  would  represent  an  increase  of  12%  to  15%  in  the  cost  of  transport,  which 
could  amount  to  almost  1%  of  final  consumption  of  households.  In  the  aviation  sector,  the 
International  Air  Transport  Association  (IATA)  is  forecasting  a  loss  of  US$2.3  billion  in 
2008, based on an oil price of US$106.5 per barrel. 

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It is to be expected that increased oil prices have particular effects in industrial sectors that are 
more dependent on fuel for their activities. In the base chemical industry, oil and gas are the 
major cost components as oil is the main feedstock and energy source at the same time. The 
rise of the oil price has direct consequences on the price of most chemical intermediates used 
for the production of plastics and rubber.  

In  the  automotive  sector,  oil  price  increases  are  likely  to  spur  more  research  and 
marketing of energy efficient vehicles and encourage fuel efficiency investments. Currently, 
most  effort  is  being  put  into  reducing  the  impact  of  energy  consumption  on  the  basis  of 
traditional  fuels.  With  petrol  prices  at current levels,  consumer  attention  is  shifting  more 
towards running costs, therefore giving industry a market argument to improve fuel efficiency 
and adjust marketing strategies.  

High oil prices can also bring opportunities as new techniques and processes are in demand 
and  become  competitive.  Sectors  that  could  benefit  are  the  renewable  energy  sector  and 
those that specialise in energy efficient technologies. There is an obvious need for increased 
research in more efficient, less consuming eco technologies – an area in which the EU has an 
important  head  start.  Current  market  conditions  can  be  expected  to  increase  demand  for 
energy  saving  and  energy  efficient  products  and  systems  and  non-fossil  fuels,  with 
corresponding  increases  in  demand  for  the  relevant  energy  technologies.  Against  this 
background,  Member  States  may  also  decide  to  review  the  place  of  nuclear  power  in  their 
energy mix. 

5. 

MACROECONOMIC IMPACTS IN DEVELOPING COUNTRIES 

Higher  food  and  oil  prices  contribute  cumulatively  to  strong  increases  in  consumer  price 
inflation  in  most  developing  countries.  If  this  resulted  in  a  general  increase  in  wages  and 
prices  it  would  make  the  increase  in  inflation  rates  more  permanent.  As  oil  prices  rise,  the 
practice in some developing countries of subsidising energy prices is becoming increasingly 
unsustainable in public finance terms.  

For net oil importing developing countries, higher fuel prices add to the stress  caused by 
high food prices, putting pressure on the poorest of the poor. The deterioration in their terms 
of  trade  implies  a  higher  current  account  deficit  and  the  need  to  find  additional  external 
financing.  Higher  oil  import  bills  have  a  negative  effect  on  the  trade  balance  and  –  if  not 
offset by other external transactions – the current account balance. The adjustment will have 
to  come  from  a  depreciation  of  the  exchange  rate  to  reduce  imports  and  promote  exports  – 
which  will  further  increase  the  price  of  oil  imports  –  and/or  from  higher  interest  rates,  to 
accompany the reduction of the net foreign reserves or to attract additional external financing. 
Higher  interest  rates  and  lower  foreign  reserves  may  slow  down  growth  and  increase  the 
financial vulnerability of the economy.  

For  net  oil  exporting  developing  countries,  the  higher  oil  revenues  create  substantial 
inflows in foreign currency, which encourage the real exchange rate to appreciate and reduce 
the  external  competitiveness  of  the  non-resource  traded  goods  sector.  These  absorption 
problems pose particular challenges for macroeconomic policies, in addition to the often weak 
governance  of  oil  revenues.  Many  oil  exporting  developing  countries  have  established  oil 
revenue  funds,  which  reinvest  revenues  and  can  be  drawn  upon  to  stabilise  the  economy  in 
less favourable times in the future. 

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6. 

POLICY RESPONSES FROM THE EU 

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 be accelerated 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. Great care should be exercised 
over  proposals  to  offset  oil  price  increases  by  tax  cuts.  The  most  likely  effect  would  be  to 
transfer  revenue  from  consumers  to  the  oil  supplying  countries,  aggravating  global 
imbalances.  This  could  be  followed  by  further  price  increases  and  would  distort  the 
functioning of the single market, undermining EU efforts to improve energy efficiency. 

The major policy response must be to make the EU more efficient in the use of energy, and 
less  dependent  on  fossil  fuels.  This  is  the  approach  followed  in  the  climate  change  and 
renewable energy package, which aims to improve the EU's energy security by reducing our 
dependence  on  imported  fossil  fuels  and  through  diversification  of  supply,  by  developing 
renewable energy as well as through energy efficiency. The EU has had the foresight to set 
itself  the  goal  of  a  low  carbon  future,  defining  where  it  wants  to  be  by  2020,  enabling 
governments, companies and households to develop the right mix of investments, incentives 
and  obligations  to  ensure  that  it  can  reach  that  goal.  This  approach  will  also  improve  the 
competitiveness  of  EU  industry  by  making  it  less  vulnerable  to  changes  in  oil  prices.  The 
agreement  to  take  the  key  next  steps  in  building  a  true  internal  market  in  energy  will  also 
reduce the vulnerability of the EU and its Member States to price fluctuations. 

6.1. 

Immediate steps: alleviating impact on consumers 

European households are feeling the impact of the current price spike. Member States have 
the possibility to mitigate the burden on the most vulnerable segments of the population.  

•  Recent  price  increases  are  being  felt  most  by  those  for  whom  expenditure  on 
energy  absorbs  a  proportionately  higher  part  of  their  incomes.  Support  for  the 
poorest  households  can  be  justified  and  may  be  needed  –  but  it  should  be 
targeted  and  promote  adjustment  to  permanently  higher  oil  prices.  Particular 
care  should  be  taken  to  ensure  that  support  does  not  constitute  an  artificial 
compensation that delays necessary structural adjustment or inhibits the necessary 
reduction  in  energy  demand.  Any  short  term  compensatory  measures  should  be 
disconnected from the energy price itself and focus on income transfers to reduce 
the loss in real income due to high energy prices. Direct income measures should 
be preferred to measures such as fuel vouchers that would blunt the signal coming 
from higher energy prices. 

•  Caution should be exercised with regard to changes in the oil taxation regime, 
because this might result in even higher prices. Lowering taxation could send a 
wrong  signal  to  oil  producers  and  markets  that  consumers  would  be  able  and 
willing  to  absorb  further  price  rises  if  their  governments  decide  to  reduce  taxes. 
Member States should avoid giving the impression that the public purse will offset 
energy price rises. The recent meeting of the ECOFIN Council reiterated the 2005 
Manchester  agreement  that  "distortionary  fiscal  and  other  policy  interventions 
should be avoided, as they prevent the necessary adjustment by economic agents. 
Measure  that  can  be  considered  to  alleviate  the  impact  of  high  oil  prices  on  the 

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poorer  sections  of  the  population  should  remain  short-term  and  targeted,  and 
should avoid distortionary effects". 

•  A  high-level  Summit  between  oil  consuming  and  producing  countries:  A 
balanced oil market is in the interest of both oil producers and consumers and can 
be  facilitated  by  addressing  all  relevant  issues  in  a  dialogue  at  global  level.  The 
EU could promote the organisation of a high-level meeting between oil producers 
and  consumers  to  discuss  a  wide  range  of  oil-related  topics,  including  demand 
forecasts, the need for new investment more coordinated approaches.  

•  The  EU  could  also  mobilize  the  international  community  to  provide  additional 
resources to oil-importing countries  to  help  them  make  structural adjustments of 
their  economies  by  mobilising  funds  from  new  sources,  including  from  energy 
producers, oil solidarity funds and private investors. 

6.2.  Medium-term structural responses 

•  The  EU's  dialogue  with  key  oil  suppliers  such  as  Norway,  Russia  and  OPEC 
should be strengthened. The Commission recalls the importance of the EU and its 
Member  States  speaking  with  one  voice  in  external  energy  relations  and  of 
coordinating  their  activities.  In  the  framework  of  these  dialogues,  work  should 
continue  to  open  new  opportunities  for  investment  and  production  development 
and  to  help  markets  become  more  efficient  and  transparent  on  both  supply  and 
demand  sides.  The  Commission  will  continue  to  explore  the  opportunities  that 
these dialogues offer for the strengthening of the EU's energy security. 

•  There is a need to monitor competition in the processing, production and sale of 
oil and petroleum products. It is ever more  important at times  of high prices to 
ensure  that  prices  are  set  under  normal  conditions  of  competition.  The 
Commission  will  continue  to  monitor  developments  in  the  sector  and  take 
appropriate action if any distortions of competition are detected. 

•  At  the  same  time,  increased  transparency  and  reliability  and  more  frequent 
publication of data on commercial oil stocks could help to reduce price volatility. 
The Commission will examine the feasibility of following the example of some of 
its trading partners in ensuring the public availability of relevant information on 
commercial stocks. 

•  The Commission will focus on security of supply and external energy policy in 
its  second  strategic  energy  review  by  the  end  of  the  year.  This  will  include 
proposals  for  improving  the  efficiency  of  EU’s  external  energy  policy  with  the 
objective of ensuring EU’s collective energy security. 

•  The second strategic energy review will be accompanied by a proposal to revise 
the existing Community legislation on emergency oil stocks in order to create a 
simple and integrated framework to provide greater transparency. It should cover 
stocks  obligations,  compliance  options,  release  coordination,  reporting  and  data 
availability.  Insufficient  or  inadequate  refinery  capacity  in  the  EU  will  also  be 
monitored. The activities of the Commission's market observatory for energy are 
being  further  developed  in  order  to  provide  the  necessary  market  data  and 
appropriate advice. 

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•  Taxation measures will be examined to support and facilitate the move towards 
a  low-carbon  economy.  The  Commission  is  examining  options  for  revising  the 
energy taxation directive. This should help to ensure that energy taxes are levied 
in  the  most  effective  and  non-distorting  way  to  internalise  external  costs  and 
support the EU's wider energy policy objectives. Similarly, car taxation could be 
made  more  effective  in  steering  consumers  towards  choosing  more  energy-
efficient cars. 

•  Windfall  profits  of  oil  extracting  industries  should  be  used  for  investment. 
Taxing them is an option being considered by some Member States. A number of 
European countries (Norway, the United Kingdom) collect tax revenues from oil 
and  gas  companies  through  special  taxes  on  profits.  However,  oil  and  gas 
companies  use  their  profits  to  explore  new  resources,  and  many  of  them  also 
invest in carbon-free technologies, which will ease the pressure on oil prices in the 
future. Ways need to be found to encourage investments in fossil and non-fossil 
energy  technologies  as  well  as  in  exploration  and  distribution.  It  should  in  any 
case  be  avoided  that  the  longer  term  consequence  of  new  taxes  or  other 
arrangements is a deterioration in investments in exploration, extraction and new 
technologies. 

•  The EU will intensify its energy dialogues with its neighbouring and developing 
partners to assist them in increasing investment in energy infrastructure, including 
a  higher  focus  on  the  promotion  of  renewable  energy  solutions  and  energy 
efficiency.  It  will  also  draw  the  attention  to  the  fact  that  fuel  subsidies  distort 
incentives to move towards greater fuel efficiency. 

6.3. 

Longer term structural responses 

•  Following  their  decisions  at  the  Spring  European  Councils  of  2007  and  2008, 
Member  States  should  finalise  their  work  on  the  Commission's  proposals  of 
January  2008  on renewable energy  and climate change with a commitment to 
reaching  political  agreement  on  them  by  the  end  of  the  year.  Giving  full  legal 
effect  to  the  proposed  targets  will  provide  the  necessary  guarantees  to  investors 
that  will  generate  the  required  change  in  the  energy  mix  and  turn  the  current 
challenge  of  high  oil  prices  into  an  opportunity  for  the  EU.  The  Commission 
therefore urges Member States and the European Parliament as a matter of priority 
to  concentrate  their  efforts  on  the  elements  of  the  package  that  require  further 
discussion. 

•  Further  efficiency  improvements  and  demand  adjustments  are  necessary.  The 
rising  prices  of  energy  products  inevitably  complement  the  economic  and 
regulatory  instruments  that  encourage  energy  efficiency.  High  prices  require  a 
change of behaviour: energy is a scarce resource, to be used responsibly and more 
efficiently.  The  EU  has  the  advantage  of being  more  energy  efficient  than  other 
parts  of  the  world  but  needs  to  make  more  serious  progress  towards  the  20% 
energy  saving  objective  that  was  outlined  in  the  2006  energy  efficiency  action 
plan.  The  Eco-design  Directive,  now  being  implemented,  sets  setting  energy 
efficiency  requirements  for  energy  using  products  to  be  placed  on  the  market  in 

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the  European  Union.7  Evidence  shows  that  households  and  industry  can  reap 
benefits  from  investing  in  energy  saving  devices  and  habits.  For  example,  the 
UK's  Energy  Saving  Trust  estimates  that  if  every  suitable  house  in  the  UK 
installed cavity wall insulation, it would cut CO2  emissions  by  around  6  million 
tonnes  and  save  over  £700  million  a  year.  The  European  Commission  will  later 
this  year  propose  to  extend  the  Directive  on  the  Energy  Performance  of 
Buildings8. 

•  The  Commission's  analysis  of  the  Member  States'  national  energy  efficiency 
action plans9 has shown that there is a gap between the political commitment to 
energy  efficiency  and  the  proposals  aimed  at  facing  up  to  the  challenges. 
Member  States  must  seriously  consider  stepping  up  their  energy  saving 
campaigns,  including  through  making  grants  available  to  home  and  building 
owners  to  carry  out  the  necessary  improvements.  Examples  such  as  the  energy 
saving partnerships operated by the city of Berlin for the retrofitting of public and 
private  buildings  show  how  the  annual  energy  efficiencies  (26%)  can  fund  the 
cost of the retrofit. 

•  Energy  intensive  industries  need  to  become  more  energy  efficient.  In  the 
medium and longer term, both because of higher energy prices and clear climate 
change  goals,  the  future  prospects  of  energy-intensive  sectors  will  depend  on 
becoming less energy-intensive, and reducing their CO2 emissions. The measures 
that will be taken in favour of these sectors in the context of the EU ETS should 
be designed with this objective in mind. The revised guidelines for environmental 
state aid10 issued by the Commission in January 2008 provide Member States with 
the possibility of supporting investments in energy efficiency, renewable energies, 
certain  types  of  biofuels  and  the  greening  of  production  processes.  High  energy 
prices only serve to make such investments more profitable. 

•  Structural  and  technological  changes  are  necessary  in  the  transport  sector  to 
make  it  more  energy  efficient.  External  costs  of  both  freight  and  passenger 
transport need to be internalised. The Commission will propose a review of the 
Eurovignette  Directive  to  allow  Member  States  to  choose  this  internalisation  for 
heavy goods vehicles. Fighting oil cost rises also requires a shift towards the more 
energy efficient modes of transport. Some of these, such as shipping, railways and 
bus or coach transport, are more efficient as they allow collective transport where 
economies of scale may be gained. Moreover, the Commission is implementing its 
renewed strategy for reducing CO2 emissions and improving the fuel efficiency of 
cars.11  As  part  of  this,  the  Commission  has  recently  made  a  legislative  proposal 
for reducing CO2 emissions of new cars to an average of 130 g/km by 201212 and 
proposed legislation for improving the CO2-performance related to tyres13. 

7 
8 
9 
10 
11 
12 
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Directive 2005/32/EC 
Directive 2002/91 
COM(2008)11. 
2008/C 82/01, Official Journal C 82 of 1.4.2008. 
COM(2007)19. 
COM(2007)856. 
COM(2008)316. 

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•  The  restructuring  of  the  fisheries  sector  will  be  accompanied.  The  necessary 
restructuring  of  the  sector  needs  to  be  managed  in  a  way  that  cushions  its 
economic and social repercussions. The European Fisheries Fund can provide the 
necessary framework and funding to support the adjustment process, on the basis 
of restructuring and de-commissioning plans allowing for a reduction of the fleet, 
for  modernisation  and  energy  efficiency,  as  well  as  social  or  reconversion 
measures.  Other measures to support the adjustment of the sector are also under 
consideration.  Such  interventions  should  not  be  directly  linked  to  fuel  prices  in 
order to avoid distortions of competition. 

•  The Commission is also currently examining the possible impact of instruments 
such as direct tax incentives, direct subsidies or reduced VAT rates as a means 
of  encouraging  energy  savings  in  households.  The  Commission  will  report  on 
the results in the autumn. Some Member States have already introduced measures 
to encourage households to buy more energy-efficient appliances, including direct 
subsidies, and the possibility to offset spending on energy saving against income 
tax.  

•  High  prices  for  oil,  coal  and  gas  require  greater  diversification  of  the  EU’s 
energy  supply.  They  will  also  narrow  price  differences  between  renewable 
energies  and  fossil  fuels.  As  close  substitutes  for  petrol  and  diesel,  the  market 
prices  of  biofuels  can  be  expected  to  follow  closely  developments  in  petrol  and 
diesel prices. This implies that greater use of sustainable biofuels will not reduce 
the impact of higher oil prices on energy consumers, but it will improve security 
of supply through diversification of sources. This will help to mitigate the effects 
of any future oil crunch, provided a higher share of renewables can be used in fuel 
blends. While recognising that is for each Member State to decide whether or not 
to rely on nuclear power, Member States could also re-examine the role that they 
wish nuclear power to play in their energy mixes. 

7. 

CONCLUSIONS 

Increased oil prices should spur the EU to implement its integrated energy and climate change 
policies.  Despite  near  term  difficulties  being  experienced  by  certain  sectors  of  the  EU 
population in meeting rising energy bills, solutions can only come from completing shifts in 
energy  demand  and  encouraging  energy  efficiency  throughout  the  economy.  Short-term 
palliative measures that Member States may take should be well targeted and should not lead 
to distorting effects on the internal market. 

Against this background, the Commission recommends to the European Council to: 

•  Confirm its determination to adopt legally binding measures to give effect to its 
2020 targets for renewables, biofuels and greenhouse gas reductions by the end of 
2008,  which  are  essential  to  improve  substantially  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 can be achieved in line with agreed objectives; 

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•  Note  that  the  forthcoming  strategic  energy  review  on  security  of  supply  and 
external energy policy, will also report on the functioning of the oil and petroleum 
markets. In addition to a proposal to improve the transparency of  emergency oil 
stocks  the  Commission  will  also  report  on  the  feasibility  of  requiring  greater 
transparency on commercial oil stocks. 

•  Note  that  the  Commission  is  examining  options  for  revising  the  energy  taxation 
directive and will shortly propose to amend the Eurovignette Directive as part of 
the wider drive to support greater energy efficiency; 

•  Note  the  Commission's  intention  to  report  on  the  possible  use  of  tax  incentives, 

including reduced VAT rates to encourage energy savings; 

•  Support the organisation of a high level meeting on oil markets between main oil 
producing and consuming countries and strengthen existing regional and bilateral 
dialogues in order to achieve better market access and transparency; 

•  Agree  that  Member  States  could  provide  targeted  support  when  justified  to 

vulnerable households; 

•  Agree that Member States could make available targeted financial support for the 
most affected entities provided this aid is used to support industrial redeployment, 
retraining or restructuring measures.. Furthermore, any measures taken to alleviate 
the  immediate  impact  of  high  oil  prices  must  be  proportionate  and  accelerate 
longer term adjustment to a low carbon economy; 

•  Agree  on  the  need  to  restructure  the  fisheries  sector  while  taking  care  of  the 
economic and social repercussions. The Commission will shortly make proposals 
for urgent measures to help ensure the survival of those segments of the European 
fleet that are most vulnerable. 

•  Agree  to  assist  net  oil  importing  developing  countries  to  mitigate  the  short  term 
impact  of  high  oil  prices,  to  improve  their  energy  efficiency  and  to  develop 
alternatives  to  fossil  fuels,  as  part  of  the  EU's  and  Member  States'  overall 
development policy and assistance programmes. 

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