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European Energy Crisis and the Hike in Oil Prices Term Paper

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Updated: Oct 12th, 2021

Abstract

The energy crisis that has rocked Europe and other parts of the world began way back in the year 2006. The effect and impact of the crisis were however not felt until this year when the prices of fuel have gone so high. As a matter of fact, energy and fuel availability are no longer as certain as they were several years back. There is a serious shortage of fuel in Europe and this has led to the fuel prices being hiked two or three times more than the standard market price. This paper focuses on the causes and developments of the crisis and most importantly future consequences, especially on the European market. This paper also focuses on the major losers and gainers in the world market as a result of this crisis.

Europe’s Energy Crisis and the like in oil prices

Europe is the second smallest continent and occupies about 8% of the Earth’s surface. It is divided into six composite regions. The regions are not equally homogenous and they include Scandinavia, Western Europe, Central Europe, Eastern Europe, Mediterranean Europe, and the Balkans. By the year 2000, it had a population of about 728 million people with an annual growth rate of about 0.1% according to 2005-2006 statistics.

Europe was the home of the industrial revolution therefore most of its economy is industry-driven. Its economy is the largest on earth. The richest states are towards the west, some Eastern economies are still emerging from the collapse of the Soviet Union and Yugoslavia. The European Union comprises 27 states and five of them rank in the top ten of the world’s largest economies in the Gross Domestic Product. They include Germany, United Kingdom, Russia, France, and Italy.

The energy resources of the European Union include coal, oil, and natural gas reserves. There are six oil producers in the European Union found mainly in the North Sea oilfields. The oil producers in the European Union include the United Kingdom, Denmark, Germany, Italy, Romania, and the Netherlands. Russia is also a prolific producer. European Union is the 7th largest producer of oil in the world producing about 3.4 million barrels a day. However, it is also the 2nd world’s largest consumer, consuming much more than it can produce at about 14.6 million barrels a day. Therefore it means European Union has a deficit of about 11.2 million barrels of oil per day. Therefore to fully meet its energy demand, Europe imports oil. Currently, The European continent is under a serious energy crisis.

Energy crisis refers to the acute shortage of fuel and other energy products leading to hiking of prices by almost 100 percent. The energy crisis rocking Europe and other parts of the world began way back in the year 2006. The effect and impact of the crisis were however not felt until this year when the prices of fuel have gone so high. In 2006 Russia was on record for having put on hold temporarily supply of gas to Ukraine so as to be able to effect a 5% increase in fuel prices. The crisis is now a reality which Europe and even the rest of the world are facing. As a matter of fact, energy and fuel availability are no longer as certain as they were several years back. There is a serious shortage of fuel in Europe and this has led to the fuel prices being hiked two or three times more than the standard market price.

Statistics indicate that oil prices since the year 2003 have been on the rise. Europe relies heavily on energy and therefore its shortage is a major blow to most operations in the region and consequently, the economy is affected. Equally, Europe has run out of natural fuel resources it then follows that they depend on imports so as to cater for their energy needs. With the shortage that has characterized the availability of fuel worldwide, Europe’s dependency on imports has gone high by at least 10% a move which has been seen by many as a threat to the economy.

Europe has for a long time being considered as the world’s giant in the renewal of resources using wind power energy. The energy crisis that Europe is currently experiencing is said to be the worst since the year 1970. At one point, world leaders pointed out that there could be a serious global recession due to the shortage of fuel.

It is for a fact the demand for energy has increased significantly over the years. Statistics indicate that there has been an average growth rate of 5% per annum that has been recorded over the past five years. According to analysts, this growth rate is extremely high in comparison with the rate that was witnessed in the past earthiness is not the first time that Europe and the world, in general, are experiencing an energy crisis.

There have been several energy shortages in the past but most of them were short-term and did not have as much impact like the one that has hit the world today. The first fuel shortage was experienced in 1973 the so-called world oil embargo and the shortage were attributed to a ban that had been placed by the Organization of Petroleum Exporting Countries. This shortage however was short-term and did not last for a long period.

Six years later, yet another crisis was experienced and the cause was said to be the war that was going on in Iran. Equally, the crisis was not as severe and did not affect most countries of the world. The war that took place in Gulf in 1991 is said to have played a significant contribution to the energy crisis that hit the world in the 90s. An electricity failure in California is said to have been the major cause of the oil crisis that was felt in the 2001 2002 economic period.

The crises aforementioned were not severe and did not have as much impact as the current crisis in the world today. So what could be the cause of the energy crisis that has hit the world today? Analysts have tried to give various possible causes that could have made a major contribution fluctuating and have gone up significantly over the past five years. Some of the causes given include:

Weakening of the world’s major currencies: Business analysts state that the world’s major currencies including the dollar, the pound, and the Euro have weakened against currencies of other countries and this contributed significantly to the current energy crisis. The dollar is the main currency of trade and its weakness in the world market in relation to other currencies of emerging economies has to lead to increased prices.

Depletion of indigenous energy resources: Resources are diminishing. Indigenous fossil fuel resources in the North Sea oil and gas are declining. That means supply has gone down in relation to demand. When supply goes down in relation to demand, the little available energy source becomes expensive.

Demand for power: Demand for energy worldwide has gone so high that the supply can no longer meet the demand. Worldwide crude oil demand has grown from 1994 to 2006 at an average of 1.76%Demand is high in the developing world. Due to soaring population and industrial growth in Europe, energy demands are going up and the supply sources in Europe are not able to meet that demand.

The need to limit the effect of climate change: Europe is a firm proponent of the Kyoto Protocol which calls for the reduction of carbon dioxide emissions. That is because carbon dioxide enhances global warming which is increasing climatic changes.

Over-reliance on importation: Europe imports 50% of its energy needs which is even projected to increase to 70% in two decades. Other countries also import oil from the same sources as Europe which has increased greater international competition. With competition, it means not all demand can be met.

Environment protection: It has been argued severally that the root cause of the energy crisis that is in the world today is due to the environmental rules and regulations that were introduced sometimes back. Europe has a blinding environmental protection obligation and wants to set an example in that respect. European countries are keen to reduce greenhouse gas emissions and improving air quality. That means most European countries are reluctant to use fossil fuels since they contribute to environmental pollution.

Role of fuel subsidies: State-funded subsidies have for a long time shielded consumers. However many of those subsidies are being reduced since most governments are finding them expensive.

Financial speculation: most financial speculation occurs when investors purchase contracts and set prices for future sales. Claims have been made implicating financial speculation as a major cause of the oil price increases.

The energy crisis in Europe has had various implications on food production, industrial growth, transportation, and diplomatic relation between countries.

Food production: Europe may not be able to sustain its food production. That is because food is grown with the help of petrochemical fertilizers and pesticides. With a crisis in energy especially oil, it means industries making fertilizers and pesticides will reduce their activities or stop completely. The long-term effects would include among others reduced yields as a result of lack of fertilizers and attack by pests.

Limited Industrial growth: Plastics, pharmaceutical products, and clothes are derived from oil. Reduction in oil means that Europe may not be able to manufacture plastics, clothes, and pharmaceutical products. Lack of plastics shall greatly affect the manufacturing industries. Plastic is essential for packaging. Failure to make clothes means the cost of clothing shall go up and few people shall be able to dress well.

Transportation industry: Vehicles, trains, planes, and ships are all powered by oil products. The transport industry is the most affected by the crisis. The crisis has led to soaring oil prices which has greatly affected the transportation industry. Governments are trying to encourage people to use public means of transport so as to cut down energy usage of private vehicles.

Diplomatic relations: Russia for example supplies the Western European market most of its natural gas. At the beginning of the year, a national Russian energy company cut off gas supplies to Ukraine in order to enforce a price increase. That was seen as antagonism which almost affected diplomatic relations

With the biting crisis, the European Commission has written a paper termed as “green paper on energy efficiency”. The paper’s rallying call is doing more with less energy. European countries are in the process of committing themselves to the proposals of the paper towards efficient usage of energy. Some of the areas focused on streamlining include: buildings, domestic appliances, industry, and transportation.

In Europe, 40% of energy is consumed in buildings. That is said to be too much. The paper provides for the application of minimum standards of energy efficiency to buildings in every country in the European Union. They intend to create a certificate to inform buyers or tenants of the energy performance of the building they intend to occupy. Buildings that may not be efficient in energy usage may not be occupied. As a result that shall commit owners to put in place measures that shall ensure efficient usage of energy.

Domestic appliances e.g. light bulbs: European countries are keen to set standards on minimum efficiency levels especially on electrical appliances. Electrical appliances also use a lot of energy. If the energy is efficiently utilized by the appliances, it will save on energy crisis.

Vehicles: European countries are keen to limit the fuel consumption of vehicles. Private cars and motorcycles consume about 10% of gross consumption. European Union has implemented voluntary agreements with the car industry and labeling cars on energy efficiency. They are also focused on reducing the national speed limit to 55 miles per hour. That will encourage buyers to buy vehicles that are efficient users of energy.

Regulation of supplying activities: there is a proposal on energy efficiency in end-use and energy services. The cost of energy is normally increased by the services offered. If end-use and energy services are integrated competition between energy service suppliers will the papers argues shall lead to a reduction in the quantity of energy used.

Electricity generation: waste level during electricity generation run up to 66%. Using standard technology, 25 to 60% is converted into electrical power. The European Union is therefore keen to improve fuel use efficiency across its electricity generation plants. Member countries are ensuring that it is only the most fuel-efficient technology for the production of electricity is used.

White certificates: member states have started to issue white certificates that could galvanize the market towards cost-effective solutions. The certificates oblige suppliers or distributors of energy to undertake energy efficiency measures for final users. The certificates show the amount of energy saved by giving energy value and lifetime. Such certificates can later be exchanged and traded. If the parties can not submit allocated shares they are fined.

Industries are moving in the direction of energy efficiency: Member countries are encouraged to give industries incentives geared towards efficient use of energy. The incentives are encouraging improvements in its processes and usage of machines towards energy saving.

Transportation: plans are in place to reorganize European airspace under the single sky initiative that will cut on air traffic. That is projected to save on kerosene utilized by planes and reducing air congestion around Europe’s airports.

Developing market for clean vehicles: Clean vehicles use alternative fuels such as natural gas, fuels, and hydrogen. Alternative sources will cut down on pollution and fuel consumer vehicles. It shall also ease dependence on oil products.

Limiting fuel consumption: Currently due to campaigns, there is improved fuel consumption but that is being offset by the increasing number of vehicles. As a result, there is a need to limit efficiency regarding the usage of energy by those vehicles.

Pricing: the current pricing in Europe has been reexamined and regulated. The pricing system has been tailored in such a manner that it encourages the consumers towards efficient use of energy.

Regulation of Supply chain: it has been realized that the distribution system is not such efficient. A lot of losses occur along the way. Transport is also costly. All this is has been worked to facilitate distribution with minimal losses as much as possible.

Optimizing Traffic Managing: plans are under to install a satellite monitoring system for traffic on the road, in the water, and on-air. The system shall be used to track down vehicles to increase safety and energy efficiency. it can also monitor behavior that leads to carelessness or wastage of energy resources. The satellite monitoring system shall also be used to underpin pollution

Tires: friction between tires and the road accounts for 20% of the fuel consumption by vehicles due to friction. There are campaigns going to sensitize manufacturers on the same. The pressure check is encouraged to be done regularly. Estimates suggest that between 45% and 70% of vehicles are driven with at least one tire below the required pressure which causes four 4%. Overconsumption (tires: http://ec.europa.eu/energy/efficiency/doc/2005_06_green_paper)

Aviation: policies have been developed that touch on the aviation industry’s communication on climate and energy use efficiency. The policies are focused on the use of economic instruments, fuel taxation to cut on wastes thus energy efficiency, and to cut on greenhouse gas reduction.

Countries of the European Union are currently keen on the application of renewable energy to avert its energy crisis as a result of dependence on foreign energy imports. They are also keen on the Kyoto protocols to combat global warming. Renewable energy now accounts for about 7% of Europe’s energy sources. By end of 2007, Germany produced 14% of its energy with the largest contribution made by wind power. Some of the Renewable energy sectors explored in Europe include Biofuels, wind power, solar energy, wave power, and hydrogen fuel.

Wind power is widely utilized in Germany, Spain, and Denmark. Statistics indicate that the European wind power market is 35% and contributes about 75% of the world’s wind power.

Portugal has the largest solar power station in the world. There is a campaign throughout European Union to utilize solar power. Solar energy is used to heat water. In 2005 solar heating in the European Union was equivalent to more than 686 tonnes of oil.

Wave power is also highly utilized in Portugal. There is a program to install a 525Mw wave power producer firm in Scotland.

The European Union is currently sponsoring a practical program of vehicle trials for battery-powered vehicles. The tests are taking place in cities like London, Barcelona, Madrid, Porto and so forth.

European countries are working to develop biofuel as alternative energy. Proponents argue that they are cheap to produce and the environmental impact is not as serious as that of fossil fuels.

As a matter of fact, analysts state that the current situation in the world market is likely to continue for a very long period unless drastic measures are put in place to prevent further damage. It is for a fact that the energy crisis’s in the world today has had a great and severe impact on all world economies. All countries both the developing and the already developed have felt the adverse effects of this crisis on their economies. Energy may be said to be the backbone of the economy of a country. Consequently, if the energy supply of a country is affected it then follows that even the supply of other resources will be affected either in part or in whole.

The Future consequences for the European market who suffers and who benefits. If the current energy crisis persists there are high prospects of economic recession in Europe and the entire world.

Oil-producing Nations will be major winners. There is forecasting that prices may continue soaring up to 200 US dollars per barrel in the next six to twenty-four months. OPEC, Russia, and Norway are going to be the winners in the global markets. Russia has a lot of oil energy reserves. It will continue dominating in supplying the European market.

The major loss will be the consumer in the non-producing countries. Due to high oil prices, consumers will not be able to fuel their personal cars. That means they will opt for bicycles or horses that do not have oil energy. Consumers will also find a lot of difficulties in paying bills such bus fairs, rent due to high heating costs for houses. Driving will be expensive and such like.

Nuclear power utilization: Nuclear power is currently under the ban from the use by the international community. It provides loopholes for making dangerous weapons. Nuclear energy is also deadly because radioactive substances that are cancerous. European market may be tempted to start using nuclear power

Coal: coal has not been so much utilized as a source of energy. This crisis and soaring prices may force European countries to explore its usage. Coal emits a lot of carbon when burned. Emissions of carbon to the atmosphere will contribute to environmental pollution.it will also contribute to global warming and finally to climatic changes. European market being forced to continue using coal shall also contravene the Kyoto protocol which it is obliged to observe.

Use of gas: Russia is a prolific producer of gas. In fact, it supplies most of the gas in Europe. The use of gas of course will render Russia the most beneficially. However, this shall course a lot dependency on Russia for most countries in Europe. In the case of misunderstanding between countries, Russia takes advantage to sabotage other economies like the case of Ukraine in the year 2006.

Use of renewable sources of energy: Renewable sources of energy include solar energy, wind, wave power, and so forth. European market may opt for such a source. The advantage is they are clean therefore friendly to the environment. Currently, most European countries do not have the infrastructure that can provide for dependency on those sources. Therefore they are good but they are not enough to drive most economies.

As a whole most countries in Europe are being affected by the soaring oil price due to the energy crisis. However, there are those sectors that could lose more. They include industries and transportation sectors.

Industries: Currently their legislation in Europe to make companies pay for all their pollution permits. The industries are required to pay certain fines of money if their activities contribute to pollution beyond certain levels. Motor vehicle manufacturing industries may not be able to do business. Large vehicles perceived as heavy consumers of fuel shall not sell as usual. That means profits shall go down and those industries may be forced to close down. Small cars that utilize fuel efficiently shall gain the market share and therefore they do good business.

The European Union has adopted plans to liberalize the energy market by forcing companies to separate power generation from distribution networks. The new set of rules has winners and losers. Consumers shall benefit from cheaper gas and electricity bills. Small energy firms shall be able to thrive in business. The measure will end the domination of the European energy market by few influential companies, for example, the Russian gas monopoly is being targeted.

The European Union is keen to put in place policies to ensure energy efficiency at local and regional levels. Local levels mainly involve each country individually. At the moment European countries are keen to cut at least 20% carbon dioxide emissions by the year 2020 at the same time pushing for an international agreement concerning the Kyoto Protocols that aims at achieving a 30% cut by all developed nations by 2020. Other targets include: to cut off up to 50% carbon emissions from primary energy sources by 2050, to attain a minimum target of 10% in the use of biofuels by the year 2020. They are also aiming at energy supply and generation activities of energy companies being removed from their distribution networks so as to increase market competition. They are working to improve energy relations with the European Union’s neighbors.

They are also ensuring the development of a European Strategic Energy Technology Plan to develop technologies in areas including renewable energy, energy conservation, low-energy buildings, 4th generation nuclear power, clean coal, and carbon capture to cut on pollution. Finally, they are working towards developing an Africa-Europe Energy partnership, to help Africa move to low-carbon technologies and to help develop the continent be a sustainable energy supplier.

European Union is also adopting what they are calling a strategy open to the world. In their international cooperation programs, they have incorporated energy efficiency agreements. Their development programs locally have been formed to also integrate energy use efficiency. Russia is not part of the European Union however their policies have also factored in Russia’s cooperation.

In conclusion, fossil fuel continues to dominate the European Union market. Soaring prices still remains a challenge which needs the implementation of the discussed policies to save the European economy.

References

European Energy crisis-The no fuel solution. Web.

Green paper on energy efficiency. Web.

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