The best energy policies are those that keep governments out of energy markets. They are extremely rare. The next best energy policies are those that do not exist at all. The European Union (EU) should bear these lessons of history in mind as it lurches toward an energy policy for all of Europe.
Energy Council ministers this month accepted a "green paper" laying out proposals for a new chapter on energy in the 1991 treaty under which the EU evolved from the old European Economic Community. A "white paper" specifying ways to implement the green paper proposals is due by the end of the year. The white paper will form the basis of debate over whether to add an energy chapter to the EU treaty. That debate will occur in an EU intergovernmental conference next year.
MORE HARM THAN GOOD
The EU would do more harm than good by adding to its formative treaty an energy chapter based on green paper proposals. in short, the paper takes disastrous roads to righteous destinations. It claims to seek global competitiveness, security of supply, and an integration of environmental and energy policies-all proper objectives. But it forsakes market forces as the best ways to pursue those goals.
The paper expresses doubts about the market's ability to provide secure supplies of energy. This sounds familiar. Governments always question the market before wrecking it with controls that destroy the affinity of supply, demand, and price for balance. Security of energy supply can face no greater threat.
Having dispensed with proven tenets of market efficiency, the green paper hints at some optimum EU fuel mix presumed to be achievable through incentives and taxes that steer investment into otherwise uneconomic ventures. And, in keeping with an unfortunate European inclination, it promotes energy tax increases as solutions to environmental problems.
Unless reason intrudes, the EU thus seems likely to adopt a patently interventionist energy policy. Europeans would be served better by no energy policy at all. The green paper points to a future of skewed investment and unnecessary cost. It points, in other words, to waste. And this wasteful future would be characterized by less security of energy supply than would prevail if markets were free, not more.
A constructive EU energy policy is not beyond hope. Indeed, an energy policy aimed at the stated objectives of supply security, integration of energy and environmental policy, and global competitiveness could be very helpful. But a policy wary of market efficiency can only hurt.
History is clear. In the last 25 years, security of energy supply has been tested dramatically by the Arab oil embargo, the Iranian revolution, and the Iraqi invasion of Kuwait. Supply jolts have been least disruptive when and where prices, supplies, and demand had the most freedom to adjust.
Priorities of any EU energy policy thus should be market freedom in all circumstances, energy trade as open and diverse as possible, and attention to the energy ramifications of decisions not directly related to energy, including those on trade and the environment. These priorities leave plenty of scope for governance.
WHY RAISE COSTS?
Costs of Europe's heavily taxed energy already are high. The wisdom of raising them even more would be questionable even if the reasons were good. But the EU green paper's reasons are poor, which makes the costly proposals simply foolish.
The EU's interventionist leanings don't stop with energy markets, of course. When in doubt, the EU governs. Until it gains control of this dangerous urge, it probably should not try to make energy policy.
Copyright 1995 Oil & Gas Journal. All Rights Reserved.
