Opinion of the European Economic and Social Committee on the 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: 2009-02-25
Institutions: European Economic and Social Committee
Subjects: ESC opinion, economic analysis, economic consequence, economic policy, petroleum, petroleum policy, price increase, price of energy








C_2009218EN.01010101.xml










11.9.2009   


EN


Official Journal of the European Union


C 218/101





Opinion of the European Economic and Social Committee on the 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
COM(2008) 384 final
2009/C 218/20
On 13 June 2008 the European Commission decided to consult the European Economic and Social Committee, under Article 93 of the Treaty establishing the European Community, on the

‘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’

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 2 February 2009. The rapporteur was Mr CEDRONE.
At its 451st plenary session, held on 25-26 February (meeting of 25 February 2009), the European Economic and Social Committee adopted the following opinion by 162 votes to 6 with 12 abstentions.
1.   Conclusions and recommendations







1.1


The European Economic and Social Committee shares the Commission's concern regarding the immediate and worrying inflationary impact of oil prices on certain sectors and on the most vulnerable parts of the population. Rising oil prices have a direct influence on the cost of heating and transport and, indirectly, of food: these items account for the bulk of spending in poorer households.










1.2


The problem demands robust and urgent action, but also raises a sensitive broader issue. Support for poor families must necessarily be provided through direct income support rather than, for example, tax measures (such as cutting tax on oil products) that would influence market prices by cushioning the impact of oil price rises.










1.3


The EESC attaches great importance to the market being allowed to perform its proper function of taking note of the rise in oil prices and identifying the appropriate responses to the situation.










1.4


The price increases should spur all operators to make suitable savings in a commodity that has become more expensive, by replacing dearer goods with less expensive ones and matching production and consumption in a way that allows savings to be made wherever technically possible. As mentioned above, poorer families must be protected, but only by means of direct financial support, without distorting the market signals that must be left free to perform their natural function of restoring balance.










1.5


As the Commission argues, similar strategies should also be put in place to help those economic sectors that have been hardest hit by oil price rises. This applies first and foremost to the fisheries sector, but more broadly to all sectors geared to meeting food demand, together with transport.










1.6


Here again, any measures that are necessary to avoid excessively damaging economic reactions should take the form of direct aid, and not tax measures (tax cuts) that would artificially depress prices which, on the contrary, must reflect the growing scarcity of oil resources.










1.7


Regarding the macro-economic impact on developing countries, comprehensive support plans must be devised, especially for the weakest economies, primarily through financial measures to support the implementation of energy-saving policies. Once again, support measures – including ambitious ones – are needed, but they must not have the effect of obscuring the signals that the markets must always be free to follow.










1.8


The Committee is convinced that strong political responses are required of the European Union.










1.9


Firstly, in this as in other cases, the unified presence of a body such as the European Union, which accounts for a fifth of world production, can have a weight and role of the first importance. Precise proposals, prepared on a common basis by a body of such weight at world level cannot be easily ignored. Matters are quite different when European initiatives are taken in isolation from each other, sometimes even appearing to contradict each other.










1.10


In a situation such as the present one, in which steep rises in a basic raw material are possible, a proposal for consultation and dialogue at world level between all major stakeholders would appear to be the precondition for any further initiatives. A world conference of producer and consumer countries might be envisaged.










1.11


Secondly, there must be a clear commitment to creating a single European energy market. Europe has been built on a foundation of major single market projects: in coal and steel, atomic energy and agriculture, and subsequently, from January 1993, in goods, services and capital; lastly, in 1999, monetary union was introduced. The time is ripe to add specific action on the energy market.










1.12


This would also have the effect of removing this key sector from the destructive pressures of speculation which, as is generally accepted, does perform an essential market regulation function within natural limits, but which beyond these limits contributes to complete disorganisation and absolute insecurity.










1.13


The European energy market must be made transparent and placed under the control of the appropriate authorities: price volatility must be curbed significantly. This can be achieved in part through targeted information and by regulating strategic stocks. Proper regulation of such an important market as the European one could not but have a powerful effect at world level.




2.   Proposals







2.1


The EU must therefore look to its original roots (the ECSC and Euratom treaties) and finally create an internal energy market, a need which is now more urgent than ever in order to forestall risks and repercussions in economic and social terms, amongst others.










2.2


The EU should equip itself with suitable decision-making instruments (putting the procedure recently introduced by the French Presidency, in response to the financial crisis, on an ‘institutional’ footing) so that it can guide internal energy policy and speak with a single voice at international meetings where these policies, including those concerning oil, are decided. This should begin with the supply price, taking it out of the hands of speculators.










2.3


The Union must convert the individual countries' national oil stock policies into a common, transparent policy, thereby giving greater security to supply policy.










2.4


It must apply common steps, such as harmonised tax measures for oil products in order to limit the losses to the hardest-hit economic sectors, and agree on direct income support for consumers, especially the most vulnerable. A proportion of company profits could be used for this purpose.










2.5


It must take more decisive action to regulate competition in the sector (currently almost entirely lacking, since the supply market operates as an oligopoly) and weigh up the possibility of applying an administered prices policy, at least during the most acute periods, or measures to narrow the often unjustified gap between production and consumption prices. This is a situation in which consumers are impotent and defenceless.










2.6


It should use a common fund to support research and development on alternative sources of energy in order to reduce oil dependency, especially in the transport sector – beginning with the automotive sector – by means of a sharp increase in investment in this area. Tax relief, for example, could be granted to investment, or oil companies could even be obliged to set aside a part of their profits for this purpose.










2.7


Deflation arising from the sudden fall in the price of crude oil and the recession must be prevented from causing worse damage than inflation. Due to inertia (or market flaws?), inflation has persisted, even after the fall in the price of crude, masking the possible arrival of deflation.




3.   Introduction







3.1


The Commission has finally decided to tackle the issue of higher – or rather fluctuating – oil prices, in the light of events over recent months arising from financial speculation and falling stock markets. These higher prices have generated inflationary pressures within the EU. The ECB and the Federal Reserve have reacted quickly to these pressures, and their counter-measures have dampened inflationary pressures but have curbed economic growth.










3.2


Only recently have restrictive monetary strategies been reviewed in order to deal with the global financial crises. The financial crisis has nevertheless produced a strongly recessionary climate that has nothing to do with oil, and as a result the inflationary pressure caused by oil has been sharply reduced. The momentum towards rising oil prices will, in consequence, be lost.










3.3


The other most significant consequence is the shift in purchasing power from consumer to producer countries, which may be offset by an increase in imports by them from the consumer countries (such imports rose by an annual average of 26 % between 2002 and 2007, a much higher rate than for general world imports).










3.4


As will be seen more clearly in the summary, the Commission looks at a number of aspects of this question, while others are virtually ignored or underestimated (e.g. the effects of speculation, the presence of types of oligopoly in the sector, easily leading to ‘cartels’ with all the ensuing consequences, etc.).










3.5


The EESC therefore needs to assess the communication frankly and objectively, highlighting its strong and weak points in order to make recommendations and proposals on how to cushion the inflationary impact on prices and production costs.










3.6


Moreover, it should also point to EU policy shortcomings, its weakness at international level, its division over the main reasons for the lack of oil ‘market’ control and the speculation which has targeted it.










3.7


One further comment needs to be made: in the light of oil price trends – sharply downward compared to July 2008 – the title of the Commission's communication should be amended. In any case, the content of the present opinion takes account of the increasingly familiar fluctuations in oil prices, and not only of the price peaks.




4.   Summary of the communication

4.1   The causes of higher prices







4.1.1


The Commission argues that the oil price spike of recent months can only be compared with that of the 1970s, that consumer prices follow crude oil prices, and that current levels stand above the peak reached in the early 1980s.










4.1.2


The Commission also considers that the current high oil prices stem primarily from a structural change in supply and demand, due to increasing consumption (especially in China and India), shrinking oilfields, the lack of responsiveness on the part of state companies in OPEC countries, the refinery capacity restraints in some countries, the weakening dollar, etc.




4.2   Impacts on the EU economy







4.2.1


The most serious repercussions include the rise in inflation, and the knock-on effect on energy prices; even when raw material prices fall the same very frequently does not happen with consumer prices.










4.2.2


The worst effects are on households, especially low-income ones, albeit to different extents in different European countries, leading to increasing economic imbalance and loss of purchasing power, in turn causing greater poverty.










4.2.3


There are also serious consequences for businesses and for growth. The Commission mentions in particular that the worst hit sectors are agriculture, transport and fisheries. It is hoped that this will stimulate greater interest in research and expanding renewable energies.




4.3   Macroeconomic impacts on developing countries







4.3.1


Oil-importing developing countries will suffer increasingly serious consequences because of rising inflation for both the general public and businesses.










4.3.2


The consequences are aggravated in these countries because of the effect on food prices, public finances, etc., while in oil-exporting underdeveloped countries, capital has accumulated and this poses special macroeconomic policy challenges in view of the frequently inadequate management of oil revenues.




4.4   Policy responses from the EU







4.4.1


EU responses are based on the assumption that these prices will remain high in the medium to long term: appropriate responses, such as those indicated in the ‘climate change and renewable energy package’ are needed, along with others for the completion of a fully-fledged internal energy market.










4.4.2


There is an immediate need for efforts to mitigate the impact on consumers, especially the poorest households; suggestions range from the tax arrangements for oil products to the proposal for a summit between producer and consumer countries, or boosting supplies to oil-importing countries.










4.4.3


Suggestions for medium term structural responses focus on strengthening the dialogue with key oil producing countries, monitoring the degree of ‘competition’ in the sector, assessing transparency on stocks, revising Community legislation in this area (stocks), examining tax measures in favour of low carbon emission sources, channelling the profits of oil extracting industries to investment, considering taxing such profits, and stepping up dialogue between the EU and developing countries.










4.4.4


Suggestions for longer term structural solutions include: reaching political agreement between EU countries on climate change and renewable energy; improving energy efficiency; introducing structural changes to make the transport and fisheries sectors more efficient; granting direct tax incentives or subsidies to encourage energy saving in households; and much greater diversification of EU energy supplies.




5.   Comments







5.1


The communication from the Commission was drawn up in the wake of the alarming oil price ‘peak’ early last summer. It should however be pointed out that the present-day economy is used to sudden and major changes in outlook, sometimes in rapid succession.










5.2


In contrast with the events of a few months ago, the world economy is now dominated by the worrying prospect of recession. According to International Monetary Fund (IMF) forecasts, this is also likely to affect all the emerging countries, which in recent times (roughly the last thirty years, following the end of what has been described as the ‘golden age’ of contemporary capitalism) had embarked upon a period of growth that was clearly and durably faster than that of the advanced nations.










5.3


Against this backdrop, the fall in oil prices from the high points in July 2008 (that were entirely unprecedented in either nominal or real terms) to the lower levels in November 2008 which, net of inflation, are back to those of 25 years ago, may be more than a one-off incident. The main concern at present among economists is that a deflationary spiral may be triggered, which would of course not spare the oil market.










5.4


It would be advisable to avoid making long-term predictions about the possible exhaustion of available reserves in the ground. This is a recurring fear, which has been around for decades – but may be unjustified. A recent edition of The Economist (21 June 2008) pointed out that known oil reserves should, at present production rates, last another 42 years (which is far from negligible – there is no knowing what may happen, especially in terms of scientific and technological innovation over the next 42 years). It also noted, however, that identified reserves in the Middle East have remained the same for many years: as the magazine pointed out, this could mean that new discoveries tend to offset the oil that is produced and consumed, or that estimates of reserves are not very accurate. It should nevertheless be underlined that the calculation is based on present production rates. The problem does not hinge, however, so much on the exhaustion of long-term reserves, as on the likelihood of future crises, arising from short-term imbalances in supply and demand, and in particular following possible interruptions in production in strategic areas.










5.5


Surveying for new reserves and sources is, and must be, a continuous process. The oil shocks of the 1970s, that count among the last century's most important events, are especially instructive and relevant in the present context. These shocks were caused by supply restrictions imposed by the producer nations rather than spontaneous market phenomena as the current imbalances seem to be. In any case, the dramatic price rises at that time triggered a search for new sources, using highly innovative production methods.










5.6


Closer attention to market developments resulting from any mismatch of supply and demand must be constantly maintained.










5.7


In the wake of the stringent monetary policies adopted from the early 1980s onwards, most prominently by the Reagan and Thatcher governments in the US and UK respectively, and based on the thinking of Milton Friedman's monetarist ‘Chicago school’, interest rates rose steeply, prompting those holding reserves to review their own priorities. They judged that keeping available oil reserves underground would be highly damaging to their interests on account of the corresponding loss of profit. Rising interest rates contributed significantly to the breakdown of the oil cartel in the mid-1980s.










5.8


A careful analysis should take account not only of information drawn from geological or technological knowledge in general but also from the results of economic analysis; on this basis, if the scarcity of resources and an excess of demand over supply causes price rises, such rises will in turn affect availability of resources, often helping to redress imbalances. It should be borne in mind that, in such cases, prospecting for new oil deposits may affect particularly sensitive ecological zones and sites (e.g. the North Pole). Alternative sources should be sought in order to prevent this from happening.










5.9


A further comment, of a methodological nature, is in order before seeking out the causes of the recent price rises. The most precise information possible on the situation that must be tackled is unarguably a precondition for any action strategy. A renowned Italian economist, Luigi Einaudi, warned that we ‘must know in order to decide’.










5.10


The EESC also calls for a clearer picture of how the oil market works. The fears arising from the major fluctuations in oil prices are based on statistics essentially focusing on monitoring of daily prices on the markets. For example, one of the best known methodologies is that used by the IMF in calculating the APSP (average petroleum spot price), an unweighted average of Brent, Dubai and WTI prices, the latter being the American price.










5.11


It may be helpful to indicate the average crude import values, which can be derived from the foreign trade statistics of at least the main importing countries. There is every likelihood that a knowledge of crude oil supply conditions is considerably more reliable than the picture provided by day-to-day market prices.










5.12


The EESC would argue that a sound analysis of the reasons for the recent steep increase in oil prices, and the even more recent dramatic fall, must be based on the real underlying trends in the world economy.










5.13


It notes, however, that the communication makes no mention of the contribution certainly made by the powerful speculative pressures to the uncontrolled increase in oil prices. Without this speculation, prices of 147 dollars in July, falling to some 60 dollars in October 2008, would be highly unlikely to occur.










5.14


Looking at movements in underlying structural data, however, it can be stated that world energy consumption has now durably passed the 10 million tonnes of oil equivalent, and this increase is underpinned by an increase in global GDP that is historically unprecedented in terms of absolute volume, if not also in relative intensity.










5.15


However, the chances of a recession, deriving from the crisis on the world financial markets, must be assessed. In any case, the fact that for four years in a row, from 2004 to 2007, world production has grown by 5 % annually, fuelled largely by the surge in the emerging economies, must not be underestimated. First and foremost come China and India, but they are not alone: even Africa is reviving and growing at an annual rate of 6-7 %; Russia is staging a come-back as a world giant; everywhere, the international scene is in a state of flux.










5.16


World GDP, calculated in real terms on the basis of 2007 prices, rose from 53 million million dollars in 2003 (calculated – quite rightly in our view – in terms of PPP, purchasing power parity, rather than market exchange rates) to 65 million million in 2007, representing an increase of 12 million million dollars. This is the equivalent of a US-sized economy being added to the world economy in just four years.










5.17


An annual increase of 5 % means that, if this rate of growth is maintained (which is not necessarily impossible), world production would increase two-fold in ten years and four-fold in twenty – in other words, in one generation. This outlook may seem unreal, but it shows how we are entering into a completely new phase in economic history.










5.18


The communication rightly recalls that, as in every other period of history, energy is a vital ingredient of growth. One of the main effects of the present very strong economic growth is therefore the powerful pressure exerted on energy sources.










5.19


As mentioned earlier, attention should be drawn to the effects of large-scale speculation on the oil market; it has the effect of amplifying movements whose underlying causes are, however, undoubtedly of a structural nature.










5.20


To understand price fluctuations, it is worth bearing in mind that at present, one third of energy consumed comes from oil.










5.21


A closer examination of the available data on oil market prices throws up some surprising results, which do not tally with the Commission's claims (source: inflationdata.com /inflation/inflation_Rate/Historical_Oil_Prices_Table.asp, Financial Trend Forecaster).










5.22


An analysis of the data reveals that, between the 1940s and the mid-1970s, oil prices in real terms – i.e. net of general inflation affecting overall price trends – remained basically unchanged, at slightly over 20 dollars a barrel. This is shown by all the relevant available sources.










5.23


For almost thirty years (the period subsequently known as the ‘golden age’ of contemporary capitalism, which the prominent historian Eric Hobsbawm described as the most intensive phase of economic development so far experienced by humanity on such a great scale), the world economy's enormous growth was not constrained by scarce energy resources: supply was clearly able to meet booming demand.










5.24


The oil shocks of the 1970s – the first in connection with the October 1973 Yom Kippur war, the second with the Ayatollah Khomeini's revolution in Iran – notoriously triggered steep prices rises which can, according to the Commission, be put down to a successful attempt by the OPEC cartel to control production.










5.25


In the EESC's opinion, however, other factors were also involved in the crisis and sudden rise in prices, first and foremost the period of serious monetary disturbances culminating in the declaration of dollar non-convertibility in August 1971. These disturbances arose from the excessive US balance of payments deficits, which made it impossible to maintain the Bretton Woods monetary system of stable exchange rates. The dollar crisis was reflected in strong inflationary pressures which eventually came to bear largely on the oil market. Lastly, it should be remembered that in the early 1970s the global economic situation was marked by a marked upward surge in production, generating strong demand-driven pressure on the entire raw materials market.










5.26


We believe that, compared with the current situation, the differences are greater than the similarities. Usually there is only the very strong growth of the world economy. No major market manipulations can be detected other than speculative operations, although these are very different to the action of the OPEC oil cartel, which was officially present at proper international conferences.










5.27


The EESC does not believe that even the present dollar stockpile, especially in China and Japan, has much in common with the proliferation of similar currency reserves between the late 1960s and early 1970s. China and Japan are not at all keen to suddenly or rashly throw their enormous dollar reserves onto the market.










5.28


The extremely tough monetary policies conducted by the major western countries led, especially from 1986 onwards, to a price collapse. It is worth pointing out that, again in real terms, average prices for the seven years from 1993-1999 stood at 23 dollars per barrel, exactly the same as forty years earlier (1953-1959), following powerful growth in the world economy and in demand for oil.










5.29


The EESC agrees with the Commission's view that the acceleration of world economic growth is no less significant for being concentrated in the emerging economies and no longer in the advanced ones. This development seems to have triggered an underlying trend towards increases in nominal and real prices from around a moderate 30 dollars per barrel in 2003 (the year in which the ‘strong’ phase in the world economic situation began) to today's level of 60 dollars, practically twice as much. It is true that between 2003 and 2007 the dollar lost a quarter of its value against the euro, which is why oil prices in euros did not double, although they did rise by 50 %.










5.30


This is the case even if last July's peak of 147 dollars was probably the result of a speculative bubble; if the peak was the product of speculation, then a return to rising prices may be expected in the near future when speculators again begin buying oil at what they consider a good price. World oil industry players, whose powerful influence should at least be curtailed and made more transparent, now consider a price around the 80 dollars per barrel level to be a ‘natural’ one, in other words at a perceptibly higher level than at the beginning of the upward phase (around 30 dollars in 2002-2003).





Brussels, 25 February 2009.

The President
of the European Economic and Social Committee
Mario SEPI