ECONOMY

Time for real moves to face energy crisis

The situation in the international energy market, especially the oil market, which is already very difficult, can easily turn critical if the price of oil continues to exceed $60 per barrel, as most banks and investment houses currently predict. The Organization of Petroleum Exporting Countries (OPEC) warned last week that, if other producers such as Norway, the United Kingdom, Russia, Canada and others continue to produce at reduced levels, it will be forced to raise its own production to 30.5 million barrels per day (bpd), from 29.8 million currently, in order to meet global demand. As a result it will further reduce its spare capacity, which is none too great at the moment (the figure varies between 500,000 and 1 million bpd). This will create further upward pressure on prices; it is certain that the big Gulf producers will first raise their prices, sticking to a tactic they began about six months ago. At present (July 2005 data) global oil production reaches 84.7 million bpd; the OPEC members produce 29.6 million, that is, about 35 percent of the total. Weak response While the global oil crisis intensifies, with still-unforeseen consequences for the economy, the Greek government appears unable to assess effectively the immense negative effects of the new energy environment on the functioning of the market and economic growth. How can we otherwise explain the government’s nonchalant response thus far and its near indifference to the obvious need for concrete measures? In an effort to provide a positive spin rather than face the situation, Development Minister Dimitris Sioufas announced two weeks ago a series of measures aiming, he said, «to reduce our country’s dependence on oil and to create a National Energy Strategy Council that will design strategies on all energy matters.» As a further PR gimmick, the measures were presented and approved by the Inner Cabinet, despite the fact that they had already been announced and began to be implemented at an operational level several months ago. One of those, the policy of gradually substituting natural gas for oil, is a decade-old fact. These measures, and others announced more recently, are two-fold: First, they aim to expand the use of natural gas as an oil substitute; second, they promote the use of renewable energy sources through the implementation of investments on electricity and heat-production ventures. A new draft bill will provide significant new incentives. Moreover, the Ministry of Development wants to promote, through another draft bill, the use of biofuel, which is expected to cover about 2 percent of our needs of transportation fuel. The government also wants to create an institute, under the auspices of the General Secretariat on Research and Technology, which will manage exploration rights for hydrocarbons. Unfortunately, the measures announced do not touch at all the immense problem of overconsumption and waste in the use of petroleum products for household and commercial consumption, as well as for transport. It has become abundantly clear that we need to cut down on consumption, since the cost of oil acquisition is expected to jump to 8 billion euros, about 4.6 percent of GDP, a rise of 1 percent of GDP or 32 percent in value. Greece paid 6 billion euros for oil imports in 2004; if prices, as forecast, range between $65-$70 per barrel, it will spend over $10 billion in 2006. These numbers will greatly affect the already negative current account and the country’s total debt, while increased retail prices will lead to increases in a broad range of products and will boost inflation. Natural gas Turning to natural gas, which the government is publicizing as if it has suddenly found a miracle cure, it does not reduce our energy dependence, since it is also imported and its prices are closely tied to those of oil. Usually, it is imported at rates about 30 percent lower than for oil and sold to consumers at a 20-percent discount relative to oil. Of course, it is important to increase natural gas consumption, since it is a cheaper, far cleaner energy source and its supply is better ensured. This increase in use, however, depends directly on the national backbone network and the local distribution networks, which are still being developed. Nine years after it was first imported from Russia, natural gas accounts for just 4.6 percent of Greece’s energy needs, with 30,000 connections to end consumers across Greece. A great part of the consumption (about 95 percent) is accounted for by the Public Power Corporation (PPC) and other industries and only 5 percent by households and commercial enterprises. It will take at least 10-15 years to spread the use of natural gas so as to have a significant impact on the country’s energy consumption; by then, it should account for over 15 percent of the total. Renewable energy The same holds true for renewable energy sources, which barely account for 4 percent of total energy consumption through solar water heaters and other solar systems for the production of heat and electricity, the use of wind power, biomass, and small hydroelectric plants. In this case as well, a large-scale national program will be necessary in order to achieve rapid use growth. This program must contain hundreds of pilot projects across the country. The program must also contain serious incentives at every level – from individual housing to community level – such as the obligatory installation of solar heaters in every new building, incentives for installation in older buildings, and incentives for installing photovoltaic arrays for electricity production in individual houses, large housing developments and office buildings. Until now, the government has managed to present itself in an advantageous light concerning the impact of oil prices on retail prices. Constant contacts with all involved, combined with relentless market monitoring, have kept price rises within reason. Everyone knows, however, that the situation can suddenly spiral out of control due to the continuing, and unanticipated, rises in oil and natural gas prices. Then it will be necessary to take strong measures that cannot be hidden behind carefully worded announcements of good intentions, soft incentives for renewable energy sources, cosmetic announcements for the foundation of institutes and other bodies, and speculation about energy strategies. It is no longer possible to exclude a rise in the Special Consumption Tax in order to put a cap on consumption. In fact, a rise in the tax now, provided it will be a steep and a one-off measure, will give the right message to the market that the government is serious about limiting consumption. Also, the effect on inflation will be a one-off thing and any subsequent rise in international prices will be absorbed, providing the government with the option to reduce the consumption tax if there is a clear and sustained downturn in global prices. Moreover, we should not exclude additional taxes on bigger cars, especially SUVs. At the same time, we should lower speed limits on national highways, with stiff fines for delinquents, and impose a total vehicle ban on city centers during peak hours. Greater use of renewable energy sources, desirable as it is, will never be achieved without serious financial incentives to consumers (for example, tax breaks, low-interest loans and a full energy market set up by the PPC and DESMIE, the electricity grid operator). A serious effort must be made to attract foreign investors in the research and development of local hydrocarbon sources. In order to achieve this, we need to set up a well-organized, sufficiently funded body, under the auspices of the Ministry of Development, which will be staffed by experienced scientists and oil-sector managers from Greece and abroad. We cannot leave the management of the country’s energy policy to an institute under the General Secretariat of Research and Technology that will be headed by professors who can be instantly transferred back to their academic appointments. Such a move not only underestimates the importance of the subject but also shows complete ignorance of how international markets function. Unless, of course, the government is not interested in the production of hydrocarbons and merely wants to provide places for its loyalists. It is especially interesting to note that, on August 16, French Prime Minister Dominique de Villepin called on motorists to reduce their speed by 10 kilometers per hour in order to save 1.5 million tons of oil by the end of the year and also save 140 euros out of their own pockets. This in a country which meets 70 percent of its energy needs through the domestic nuclear industry and which – through oil major Total – controls major oil and gas reserves in Africa and South America. De Villepin recalled four ministers from their summer holidays in order to entrust them with a prompt revision of the government’s energy plans, in order to limit consumption and further reduce energy dependency. Since the Greek government is unable to plan, much less implement, an effective energy policy, it should study what other European governments are doing to conserve energy, promote the use of renewable sources and manage hydrocarbon sources, and copy the best policies. Only then will Greece be able to gradually reduce its dependency on imported oil.