Views from the World
The UK and Europe in The Global Competition for Energy and Resources
William Keegan, Senior Economic Commentator, The Observer
(Keizai Koho, November 2008 issue)

  Energy is at the very heart of the European Union. The origins of the EU stretch right back to the formation of the European Coal and Steel Community in the early 1950s. The aim of the Founding Fathers of what later in that decade became the European Economic Community was that France and Germany should never go to war again (Germany had invaded France three times since 1870.) Uniting the two nations in the extraction and production of such basic energy supplies was an historic event. As the Italian economic Tommaso Padoa-Schioppa noted some forty years later: “Establishing joint supra-national management of coal and steel - the two fundamental natural resources of the nineteenth and early twentieth centuries, over which France, Germany and the rest of Europe fought cruel wars - was a highly political project.”

  So, as the advanced industrial countries of Europe struggle to come to grips with a world characterised by competition for energy and other resources, amid growing fears that ‘global warming’ must influence the way in which, and the extent to which, those resources are utilised, their leaders should never forget that cooperation in energy policy is supposed to be at the centre of their approach. Yet, as concerns multiply about the security of future supplies, marked discrepancies are appearing between the theoretical goals of a common European energy policy and the scramble for bilateral deals with Russia. Moreover, while lip-service is paid to cooperation within the European Union, the emphasis in practice, whether one looks, for instance, at Germany, France or Italy is on the construction of what are known as ‘National Champions’- large energy conglomerates, strongly encouraged by individual governments.

  If Continental countries - mostly members of the Eurozone - are acting to a large extent in a more nationalistic manner than the Founding Fathers of the EU might have expected all those years ago, the same can be said with a vengeance about the United Kingdom.

  The UK did not, of course, join the EU at its inception and by the time it did (1973) it already had the ‘black gold’ of North Sea oil in its sights. There was a brief period, as North Sea oil was developed in the mid to late 1970s, when there was talk that Britain might in some way ‘share’ its oil with the rest of Europe. Political and economic realities soon dealt with that. Why, even Scotland was given short shrift by the government in London when suggestions were made that, as most of the newly developed oilfields were in ‘Scottish’ waters, Scotland was entitled to the revenue. Oh, no! That was not at all the way either the Labour governments of 1974-79 or the Conservative government of Mrs Thatcher from 1979 saw things at all.

  There were both advantages and disadvantages for the UK with the discovery of North Sea oil, and the way the oil, and other aspects of economic and energy policy were handled, has implications for current and future policy. Frankly, the Thatcher government took a short term view of North Sea oil, Whereas the Norwegians, on the other side of the North Sea, used the ‘windfall’ of oil for useful long term investment, the British government opted for maximum exploitation (one Minister privately admitted that “We are using the revenues from the North Sea to finance the unemployment caused by the Thatcher policies”). Britain for a time enjoyed a huge balance of payments surplus in oil and gas, but is once again a net importer; furthermore, unlike Gulf states such as Saudi Arabia, which take a long term view, the British government managed to exploit the bulk of its oil and gas reserves quickly, at much lower prices than those recently prevailing. This was combined with a doctrinal ‘free market’ strategy, under which the public utilities were privatised, because Mrs Thatcher and her colleagues disliked public ownership - a practice in which, having opposed it in opposition, Tony Blair and Gordon Brown, acquiesced when in government.

  The fact of the matter is that both Britain and the rest of Europe are now potentially vulnerable on the energy front. All are dependent on Russia - as well, of course, as on the traditional source of oil in the Middle East - and Britain is also dependent on France. Indeed, we have reached a situation in the UK - especially in England, whose population is more ‘eurosceptical’ than those of Wales and Scotland - where the opinion polls continue to show hostility towards ‘Brussels’ and the European Union, yet a country that privatised its energy supplies is now increasingly dependent on supplies of electricity from a state-owned French enterprise.

  A study by the Royal Institute of International Affairs in London (Chatham House) recently noted that the option of building new coal-fired plants would run counter to the UK′s EU and Kyoto commitments to reduce emissions of Greenhouse Gases (GHGs). Moreover, simply to maintain current levels of nuclear energy would require significant new investment over the coming decade - investment for which the French nuclear industry is better equipped than the UK′s. Hence there has recently been a UK-government-sanctioned deal for the French nationalised concern EDF to go ahead with the development of Britain′s nuclear industry.

  The RIIA concluded that “Even the most optimistic scenarios show that renewable energy sources will deliver only about eleven percent of our electricity supplies by 2015, and at considerable cost”.

  Britain will be dependent on increased imports of gas for its marginal increased energy needs, the bulk of which will have to come from Russia. Indeed, the nation that gave the world the word and concept of ‘privatisation’ will be dependent on Russian state monopoly supplier, Gazprom.

  This is not the most healthy of scenarios, either for Britain or the rest Western Europe. The Russian practice of disrupting pipeline supplies for political reasons has come as a huge shock to Western Europe. Some observers rationalise the situation and say that Russia needs Western Europe more than Western Europe needs Russia, but most experts are concerned about vulnerability to potential disruption.

  The London-based Centre for European Reform points out (“Pipelines, politics and power - The future of EU - Russia energy relations”) that, since the EU receives over forty percent of its gas imports from Russia, and two-thirds of Russia′s gas exports go to EU countries, “Logically, the EU and Russia should have a well-developed energy relationship… EU-Russia energy relations should be straightforward, mutually beneficial and fast-growing. But they are not.”

  Quite apart from the threat of arbitrary disruption of supplies, Europeans worry even more about the limits to total output of oil and gas in Russia, because of poor new investment, at a time when Russia is showing more interest in the Asian market. Hence there has been renewed European interest in energy supplies from North Africa and the Caspian region, and, whatever the occasional scares about ‘nuclear energy’ (which supplies some eighty percent of France′s electricity) countries such as Britain feel they have to ‘go nuclear’.

  If there is a lesson for the individual countries of Europe in all this it is that they could probably achieve more geo-politically by combining forces in their dealings with Russia, than by allowing the Russians to ‘divide and rule’. The Founding Fathers of the EU must be turning in their graves at the sight of nationalistic energy policies at a time like this.

Copyright (C) 2008 Keizai Koho Center. All rights reserved