Friedemann Muller, Non-residential Senior Researcher, German Institute for International and Security Affairs, Germany

Europe, West of Russia, is the biggest oil import market in the world. It imports from outside of Europe more oil (14 million barrels per day in 2007) than the United States (13.6 mbd). In addition Europe is the by far biggest natural gas import market. It imports twice as much as the U.S. (262 billion cubic meters in 2007, U.S. 131 bn cu m³). It is obvious that Europe’s security of supply of oil and natural gas is sensitive and of major interest to potential suppliers.

There are not too many of them and it is therefore important to know whether these exporters link political interests with the economic interest of optimizing the trade revenues. It is no question that the main supplier to Europe of oil and natural gas, Russia, has a political agenda linked to its oil and natural gas exports. It is less but also obvious in the case of the Middle East and North Africa, the second and third largest largest energy supply regions of Europe (chart 2). The Gulf States like Algeria and Libya are members of OPEC and thus belong to a cartel which already once - in 1973 generating the first oil crisis - made use of its supply power for political reasons. Iran, one of the Middle East States has not made a secret out of its political interest to put pressure on Europe or to mitigate the pressure Western states put on Iran due to its nuclear program. Most experts say that, considering this situation, Europe has to speak with one voice in order to be a strong advocate of the common European interest of a secure energy supply. However, the national interests of European states and also EU member states are different for a number of reasons:

• Some European states such as the United Kingdom, have a high degree of self supply and therefore are little import dependent, others such as Ukraine or Germany or Spain are heavily dependent on imports;
• Some European states as the Mediterranean states have a geographic advantage for diversifying there imports while the states located further East are traditionally more dependent on one supplier which is Russia;
• Some European states are not equipped with much natural energy reserves but have made efforts to balance this problem by shifting the energy mix to nuclear energy, such as France and Hungary, or to renewables, or have made infrastructural efforts to improve the diversification options by constructiong pipelines or LNG ports, such as Italy, while others count on Europe to solve there dependence problem.

These differences make it difficult to formulate a common European energy policy. There are, however, clear common interests in Europe as well. Among them are:

In spite of the mentioned national differences of interests within Europe it is obvious that the common interests should be made use of to design a common policy. What are the main problems and how could they be solved within a European strategy? Let me explain two different problems, one for oil and one for natural gas.

Oil Supply of Europe

Different from natural gas, oil is traded on a world market basis. Principally oil can be shipped from almost any producer country to almost any consumer country by tanker which makes the transport very flexible and competitive. There is an important exception. Central Asia and the Caspian region are landlocked. In order to transport the oil to the open sea and the consumer it has to be shipped through pipelines crossing foreign territories. This creates a special temptation for geopolitical maneuvers.

There is another important point why the oil market as a whole cannot be called a competitive market. More than 85 percent of the oil is produced by state controlled companies. This share is much higher than during the 1980s and 1990s. In 1973 this share was only 20 percent. The state control over the production means also control over the investment and over the amount of production. It is clear that if oil production had been opened to foreign and private investors more oil would be produced and the oil price could be much lower, close to the mariginal production costs which are less than 20 dollars per barrel. But the political interest of OPEC countries as well as Russia is to keep the price high up and to use the availability of oil resources to improve the producer’s political position in the international arena.

While the oil price has its ups and downs as we particularly felt in recent times we have three stable, long term and irreversible trends that will further strengthen the position of producer countries:

• All other oil producing countries or regions but the Middle East and the Caspian region exploit their remaining reserves much quicker than the two mentioned ones, that means that the concentration of reserves in the Middle East which is already 62 percent of world reserves and currently only seven percent in OECD countries will further increase (chart 3 and 4).
• In all oil producing regions the production will decline during the coming decades. This applies not only for North America and Europe but also for China and India (chart 5). The result is that import dependence is growing even if the oil consumption is kept even.
• The secular demand growth in the emerging economies mainly of Asia will put a tremendous pressure on the oil market. The International Energy Agency assumes in its projection for 2030 that the combined import demand of China and India which creates already now problems on the oil market will quadruple until 2030. The motorization of the societies in both countries cannot be stopped by any political force from outside (chart 6).

These three trends will produce a strong pressure on the oil distribution. Particularly oil rich regions that are exposed to geopolitics such as the Caspian region or reserves that are located in weak states for instance in Africa will be matter of disputes and conflicts as we can see it in Sudan, Nigeria, Angola or recently in Georgia. It is obvious that individual European states have no chance to influence the route of pipelines or can balance the interests of states such as China, the U.S., Russia or even Iran. Considering the foreseeable scarcity of oil on the freely traded oil market the situation is precarious enough to make a major effort for a joint European oil policy.

Natural Gas Supply for Europe

The case of natural gas is even more urgent and problematic. Europe receives 80 percent of its natural gas imports from outside Europe by pipeline and only 20 percent by LNG (chart 7). Different from the tanker transport the pipeline is neither flexible nor competitive. Long term contracts with a price link to the oil price substitute a competitive market where the price is balancing demand and supply. This constellation of an expensive pipeline investment which needs to work for at least two decades in order to amortize the construction costs creates a bilateral monopoly between producer and consumer. The consequence is a mutual but certainly not symmetric dependence. If Russia cuts the natural gas supply for a week it creates panic on the consumer side. If the consumer countries don’t pay their bill for a week it will hardly find any public attention on the Russian side. This asymmetry gives Russia the opportunity to play with the weapon of European dependence as it did during the negotiations with the EU on Russia’s WTO membership. The dependence is extremely strong due to the fact that infrastructure does not allow to ship natural gas to East and Central European countries in case of a Russian delivery stop even if suppliers, for instance from North Africa or the Middle East would provide the necessary amount of natural gas. There are, of course, alternatives to Russia in theory. Iran and Qatar together hold more natural gas reserves than Russia and they have much more potential with less investment means to increase their output. Europe as the, by far, largest natural gas import market in the world not only today but certainly also in 2030 should be in the position to import from all big suppliers that are located not futher away than West Siberia. This would, however, not only require a transport infrastructure from outside Europe to Europe, but also a much improved transport infrastructure within Europe. Today it is technically not possible to transport natural gas from North Africa to Germany or any state further East, while Italy, Spain or France can purchase natural gas from Algeria or Libya.

What is required?

We need a very different European approach with regard to the two most important energy carriers – oil and natural gas. Since we know that oil will never become a product of a free and fair competitive market again and the limited remaining reserves will be more needed by states that don’t have the technologies for alternatives to oil. Тhe European states like North America should make a major effort to speed up the transition from the oil age to the post-oil age. This requires more efforts with regard to R&D it also requires a dialogue with the oil producing countries. They could be interested and helpful to manage a smooth transition process. Since most of the OPEC countries are situated in the sun-belt, they might be interested to invest their petro dollars into solar facilities that might produce large scale electricity for the European market. If we don’t start to think about the management of the transition period into the post-oil age we might get increasing distribution conflicts and a further power shift from the major consumer to the producer regions.

With regard to natural gas we have to make any effort to improve the transport infrastructure which allows to have alternatives to the current very limited supply infrastructure from outside Europe to Europe. We also need an infrastructure within Europe which allows the transportation of natural gas from where it is available to where it is needed, for instance from the Atlantic Ocean to Ukraine. The current infrastructure is far from this. The demand for a better infrastructure includes a pipeline South of Europe which allows being fed from many natural gas rich countries south of Russia such as Turkmenistan, Iran, Iraq, Azerbaijan and possibly Qatar and Saudi Arabia. The world’s most natural gas rich region between the Caspian Sea and the Persian Gulf has to get access to the world’s largest natural gas import market which is Europe. This is good for competition and thus for lower prices but also for the security of supply.

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