Europe’s trillion dollar disaster—
Energy non-policy
David Heilbron Price
All rights reserved © 20020108 /2006
The Euro arrived two decades late! Europe could have had the gains of today’s Euro and the single market a generation ago! Agreements by European governments in 1973 foresaw the full economic and monetary union by 1980. What happened? In the 1970s the European Community became a hapless victim of energy price hikes, Middle East war policy and the then inflationary petro-currency, the dollar. It was rich in 1970 but became almost bankrupt.

To ensure its future, Europe must be able to regain control of its ‘Energy Destiny’. It can no longer remain as a passive victim of shocks from speculation or international politics. In the past energy has been used as a weapon; it must become an instrument of peace and fairness for both importer and exporter. We live in an interdependent world. Europe and the USA must create a broad, strong Energy Community with the energy exporters. It has to be based on similar principles as the European Community— international rule of law that really works. Community-style, supranational law is a civilised and civilising process. If the USA feels it cannot join with Europe, the EU being far more insecure must pioneer the effort. It will assure its economic survival.

After the 11 September 2001 terror ‘attacks on civilisation’ in the USA and the increased confrontations in the Middle East, the risks are increasing every day. Mounting energy imports, increased European vulnerability, however, is accompanied by equal amounts of complacency and amnesia. Policy incoherence of the EU15 will multiply with the adhesion of a dozen candidate countries.

In 1950 when Robert Schuman initiated the European Community, energy imports amounted to only 11% of consumption. By 1957 official European reports warned of the very grave political dangers from booming but insecure imports. War and an oil embargo hit the Middle East in 1967, together with civil war and an oil-blockade in Nigeria. In 1973 Europe suffered the impact of a violent quadrupling of energy prices. Posted oil prices of $1.80 a barrel in 1970 rose to $2.90 in early 1973 but with the application of the ‘oil weapon’ in the October war, the price hit $11.65 by the end of the year.

The UK Stock Market plummeted by as much as the 1929 crash but twice as fast. By 1974 the effect on Europe was as devastating as a military assault. A Soviet military publication noted it had seriously affected the West's military capacity to defend itself.

With this first shock, oil costs were increasing at a rate of more than an extra trillion dollars a decade. But in 1979 the second, severer oil shock struck, quadrupling prices again: spot prices hit the $40 to $50 range. 

As a result the European economy was brought to the brink of collapse. The effect was not only economic: inflation destroyed industries, savings and pensions and created social tensions that rocked European society to the roots. Plans for European economic and monetary union (the Werner Plan) were abandoned for two decades at enormous social, economic and political cost. Europe’s vigorous growth and its huge foreign currency reserves – the largest in the world – were wiped out. The developing world is still suffering from massive debts and resulting conflicts.

Today those lessons seem forgotten. The European Commission estimates that by  2020 or 2030 the EU will become 90% dependent on imported oil, 70% for gas and even coal could be 100% imported. By then world population will have grown by one third to 8 billion people, all aggravating world energy demand.

Europe, in spite of the Euro, still buys its oil in a foreign currency, the dollar. Although the EU is an economy of comparable size to the US, its energy costs are subject to fluctuations of the US internal economy and US monetary policies as well as ‘the free market’ for oil. The 1973 oil shock was proceeded by dollar inflation (imported into Europe) and the devaluation crisis.

Are we now living in a period of stable prices, free from ‘energy shocks’? In 1999, oil prices dropped below $10 a barrel. What was the longer-term view of practical oilmen? Three months earlier the chairman of Royal Dutch/Shell, Mark Moody-Short had revealed a 5-year plan that assumed a price of $14 a barrel. In March 1999 he talked about moving it to $11. The chairman of another oil giant, BP-Amoco, Sir John Browne, was working on similar assumptions. These plans were presumably based on the best data that money can buy: demand/supply figures, risk analysis, meteorological trends, alternatives, innovations, ecology. What did the economists predict? The Economist magazine with its international network of economic expertise said: ‘we may be heading for $5. … a normal price might now be in the range in the $5 - $10 range’.

At the time of this 1999 ‘oil glut’, economist Prof. Paul Krugman commented that ‘the rise and fall of oil prices was one of the most spectacular and puzzling events of history’. He added that a ‘theory of markets that can’t explain the energy crisis {of the 1970s} is probably not much good for anything else.’ He warned of a possible replay of that energy crisis. When will it come? A crisis does not just last months or a year but maybe, as in the past, a decade or more. It would devastate our economy.

Within a just few short months of these 1999 predictions, oil had more than tripled in price to over $30. Many European cities were brought to a halt by protests from lorry drivers and citizens outraged at the price increases. Any consumer who suffered similar rip-offs for any other key resource would be suspicious of market manipulation, global power/ hedging manoeuvring or political —foreign policy— intervention.

While the impact was less traumatic than the price hike of earlier decades, the puncturing to the economy is still very costly. Adding $25 to every barrel of oil and gas equivalent dispossesses the EU annually of around $100 billion extra for exactly the same goods. Who was behind it? The Economist reflected later, that a number of OPEC states plus Norway, Mexico with Russia (the second largest oil producer) in the background forced up the price. Who knows? but if so, this Viking raid pillaged the purses of oil consumers around the world. They had no recourse to democratic decisions at home or abroad. On the international markets, China, until recently an exporter of energy has now become the world's second largest oil importer. It increased its imports by a fifth between May 2005 and May 2006. Its burgeoning requirements account for some 40 per cent of the increase in oil demand from 2001 to 2004. The next decades will see the planet's added billions of people demanding increased food and material comfort that will stoke a huge energy demand. 

By 2002 the EU was already paying more than double on spot and futures markets, now apparently solidly ratcheted upwards and far from a predicted $5. In 2006 it hovers around $70 and some economists predict even higher prices in winter. No raw material has had such violent fluctuations in price as oil and gas. No raw material seems to have provoked such violent political consequences. Africa in the 1970s fell victim to huge debts from whence sprung its present miseries of incessant wars and killings.

Is an unpredictable cartel a fitting way to accelerate, brake or even steer the entire world economy in the twenty-first century? Is ‘price volatility’ just unauthorised redistribution, leveraged ‘free (for some) trade’ or the slippery slope to a mega-disaster?

The collapse of a dominant trader in the energy market, Enron, in November-December 2001, (called then the largest US corporate collapse) has further disquieting aspects. Known for its ‘innovative use of financial theory and risk-management skills,’ Enron’s default has been paralleled with the calamitous, multi-billion dollar collapse of Long-Term Capital Management, a hedge fund that threatened the entire financial system. Are Europeans to remain bystanders to these global problems?

These are indications of a volatile future ahead as Europe prepares to nearly double its gas and oil imports in the next few decades. Europe needs to prepare a stabilised market for its most important imported resources NOW. We cannot afford the complacency of the past, or repay its paralysing costs. World terrorism centred on Middle Eastern countries, control of economic/political levers by ‘oligarchs’ old and new in the Former Soviet Union and accentuated profits-fixation by businesses in many western countries will not provide any guarantee of stability, even less a fair deal for the planet’s ecology and the consumer.

Without a framework of ethics, law and democracy, the invisible hand of the market tends to become a mailed fist. The events of 11 September make it clear that the profitable functioning of a global market is itself the target of suicide fanatics. A few dollars worth of box knives in the hands of terrorists led to $1.2 trillion dollar loss on the stock market. Global market destruction by suicide defies the very premises of economic logic (such as the motivation of personal economic benefit). We have to reflect more wisely about our policies with a better understanding of our own human species, together.

What are the alternatives? As far as Europe’s heightening reliance on gas is concerned, it is unrealistic to assume there is no danger. Gas prices generally reflect oil. Europe has been doubling its gas imports every few years. Russia already has a dominant and growing position as importer. If a major producer created a new profitable market leverage in gas, would smaller importers like Algeria, Turkmenistan or Norway object? Pipelines, unlike tankers, can’t be redirected overnight.

Most of our imported energy comes from politically unstable areas. Must Western Europe, now one of the world’s most stable and peaceful areas, continue to be the victim of their instability? The alleged perpetrators of the events of 11 September have implicitly blamed the Saudi government for the US occupation of its holy Arabian lands, ‘plunder of its wealth’ and betrayer of their version of Islamic values. Disruption of Saudi oil would have major economic and political consequences for the entire region, as would another Middle East war. Europe’s major gas importer and transit states, Russia, Ukraine and others are still considered by the IMF as among the world’s most corrupt states. Russia's leaders say they are instituting to a ‘dictatorship of law’ rather than the democratic application of it. The EU has a responsibility to give more realistic help to the post-Soviet democracy. An Energy Community solution would be the most positive assistance to Russia and other oil and gas producers tempted by sudden but dangerous wealth. It would reinforce democracy.

Europe can commit its vital interests with its energy importers and transit countries including Ukraine, Belarus and Caspian states only in a community system, with five institutions working in a model of democratic solidarity. No other existing system has these strengths and safeguards. The benefits of an open, single energy market for all of us must be the basic philosophy behind any enduring European security strategy.


David Heilbron Price is editor of the Schuman Project website: He has written several books on the need for an Energy Community and the politics of Robert Schuman, creator of the European Union. Contact:
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