The price of energy in the EU.

Greek Crisis and EU Energy Prices

Dr. Mike Clarke, FIEAust, CPEng, FAusIMM, RPEQ, M.E.T.T.S. Pty Ltd

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Of the many facets of the crisis that is gripping EU most commentary is focussed on monetary problems. However, there should be more attention paid to the cost of energy in Europe. Although this was not the main source of the crisis, it is of critical importance when considering how the distressed European economies are going to get out of the current mess.

The EU is a high energy cost region. It has very little developed indigenous energy resources (Polish coal, some North Sea oil and gas) with the major portion of the EUs energy being imported from other continents. Foremost among these are oil and LNG from the Middle East and Africa, coal from Africa and South America and gas from Russia.

All of these inputs are at world parity price and the large import volumes acts as a price setter for world energy prices. This is to be contrasted with the USA and China where large indigenous energy resources serve to lower the cost of energy to industrial and domestic users. In the EU the high cost of energy is exacerbated by energy taxes ranging from high excise duties to carbon taxes.

In the USA there has been a revolution in the production of gas from large shale reserves. The rapid development of these reserves is eliminating the need for the US to import gas as LNG and may shortly turn US import terminals into export terminals. Crucially the price of gas on the US market has collapsed, making gas cost competitive with the nation’s large resources of coal for power generation.

In China, energy supply is dominated by large indigenous coal production, especially in the western provinces. The mining cost is very low and it is used for the generation of power which is now being supplemented by large scale hydro-power. China’s main problem is that low price generation is remote from the eastern seaboard where there is most demand. Nevertheless, these vast coal reserves are being increasingly used to produce high value commodities (such as PVC) which set the floor price in the region and the world.

The problem is that the high level of unemployment in the EU, particularly in the distressed economies, requires a resurgence of industry (as opposed to slashing wages, housing construction using borrowed money or ephemeral financial services) to generate employment and the high energy cost places the EU at a disadvantage to its competitors. There will be a temptation to re-introduce tariffs to help overcome this problem.

At present in Australia we are in the low energy cost camp. However, there are pressures to raise the cost of energy to EU levels, with, on the one hand, market forces lifting the price of domestic gas to the LNG export price, and on the other hand, the political will to minimise the use of coal and introduce carbon taxes. Should Australia’s mining boom fail, there may be pressure here to re-introduce tariffs to help generate jobs and it will be difficult to re-engage basic industries lost due to the current high dollar without a complete overall of energy policy and pricing.