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EU: Energy & Climate Policies Vs Rising Oil Prices

Commission calls for swift adoption of energy and climate policies as best coordinated response to rising oil prices

The European Commission has today debated the policy responses needed to mitigate the effects of rising global fuel prices. Based on today's conclusions, President Barroso will present a communication, to be adopted in good time to be discussed at the European Council on 19-20 June in conjunction with the recent Commission communication on rising food prices.

The College of Commissioners analysed both structural and cyclical factors and proposes a co-ordinated policy response, including immediate, medium and long-term policy options.

Based on Commission proposals made over the last two years, these 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 and support for the organisation 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 Commission agreed that member States take short term initiatives to support the most deprived sectors of the population. These measures should fit into a co-ordinated strategy and should avoid distorting effects on the internal market or on fiscal and monetary policy.

Commission President José Manuel Barroso stated:

"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.

"At the heart of our approach is the full implementation of the Commission's energy and climate change proposals including increased energy diversification, security of energy supply and energy efficiency. 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. I look forward to discussing this with Member States in the European Council next week."

Why have fuel prices risen?

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. The College of Commissioners examined the reasons behind the recent surge in fuel prices, both within the EU and internationally.

The current surge in oil prices is largely the result of a major structural shift in oil supply and demand in the global economy. Oil supply is struggling to keep pace with rising global demand, especially in China and India.

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 dollars in the first quarter of 2008.

The rise in oil prices is part of a structural shift, rather than a temporary phenomenon. Global energy demand could be 50% higher in 2030 than in 2007, with fossil fuels continuing to dominate the fuel mix.

Without implementation of the policy agreed by the European Council, 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.

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 in the fourth quarter of 2007 averaged 0.8% in the euro area. This has a direct impact on households throughout the European Union. 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 for the same period.

The prices of liquid fuel for household purposes have risen by 35.2% and those of fuel for transport equipment by 12.7% as opposed to the HICP average of 3.6%. The communication also looks at the 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 today set out a series of immediate, medium and long term proposals to respond to increased oil prices. These proposals, to be formalised in the forthcoming communication will, inter alia, recommend 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 be achieved in line with agreed objectives;

* Note that the Commission 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 Commission 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 Commission's intention to report in the autumn on the possible use of tax incentives, including reduced VAT rates to encourage energy savings

* Support the organisation of a global summit 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 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 development.


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