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High oil prices destroying European gas demand

High oil prices are destroying gas demand directly or indirectly, leading to consumer outrage in Europe.

But not only might they be short-lived; but there are other, painless, ways of reducing industrial and residential demand too.

"It would be futile for governments to use public money to offset energy price rises." -- EC President Jose Manuel Barroso

Although the European Union is trying to reduce its carbon emissions and although its executive, the European Commission, is generally in favor of markets to send price signals, its governments do not like the signals they are receiving from hauliers, fishermen, and the public at large.

But European governments should be cautious about widespread tax breaks and subsidies to offset the impact of record oil prices. (See chart: Dated Brent crude: Jan 2 - Jul 8 2008).

"As for oil prices, immediate steps are justified to help the most hard-pressed households, but it would be futile for governments to use public money to offset energy price rises that are here most likely to stay," the EC President Jose Manuel Barroso said June 18.

Barroso told the European Parliament in Strasbourg that the EC would present proposals to increase transparency in emergency and commercial oil stocks and design plans on taxation to support the transition to a "low carbon" economy.

In its policy response to record energy prices published early June 2008, the EC accepted that short-term, limited tax breaks should be considered by member states to alleviate soaring energy costs for the poorest households.

But the EC urged "great care" over proposals to offset oil price increases by tax cuts which could further inhibit a "necessary" reduction in energy demand.

In the policy response, the EC urged European leaders to accelerate their drive towards greater energy efficiency and to cut Europe's dependence on imported, fossil fuels. (Listen to a related podcast: Consequences of rising European gas prices.)

The EC sees these as key medium and long term steps to soften the impact of sky-rocketing oil prices.

Some see oil prices weakening

Not everyone though sees oil prices as necessarily high forever.

Apart from anything else, they bring with them the risk of such huge demand destruction that economies shrink, two consultants told a conference in London organized by the Society of British Gas Industries on June 18.

According to the Center for Global Energy Studies, today's oil prices are a blip, and not a long-term reality, because there has been no profound change in market dynamics to suggest they can be sustained.

The chief economist for the Centre for Global Energy Studies Leo Drollas said that today's price resulted from a demand surge that began in 2003 and cuts in OPEC production over the past few years, which had been masked by Angola joining OPEC.

But a permanent shift in the market was needed to prove that today's prices are now at a sustained level, "and I do not believe that (has happened)," Drollas said.

Drollas dismissed a number of commonly cited reasons for high prices, including a weak dollar, and the "peak oil" argument, which says the world is now more than halfway through the world's oil reserves.

He gave the example of the US: In the early 1970s the US' oil reserves were put at 35 billion barrels, enough for 11 years' consumption at the consumption rate at that time.

A similar reserves-production ratio emerged at the end of last year, too, although then the reserves were down to 21 billion barrels.

But between those years, the country produced 90 billion barrels, Drollas said.

Next page: New discoveries keep exceeding oil output

Created: July 9, 2008

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