political economy of european energy affairs
Epochal times, European change
The goal of this book project is to analyze the international political economy of energy affairs with an emphasis upon issues related to the energy security strategy of the European Union. The litera-ture provides evidence to suggest that the epochal rise and development of modern capitalism and modern business is closely intertwined with the oil industry, a total-economy, as is strategy, global politics and power ( Yergin, 1991:13).
Already Jean Baptiste Say made a point out of distinguishing politics, the science of government from the study of political economy which should show how wealth is formed, distributed and consumed (Say, 1806). Jean-Baptiste Say also emphasised the role of production in shaping a political economy.Some observers believe energy affairs more often than not have assumed the character of a positional good in international affairs, once market structures come to be integrated into the structural component of power ( Bromley, 1991:83, Lampel, Ahlstrand & Mintzberg, 2001:84, Soligo & Jaffe, 2004). Yet, the world’s energy system constitute a theoretical “no man’s land lying between the social sciences” ( Strange, 1988:91). This presupposes an analytical perspec-tive from political economy. The interactions between state-market are changing in Europe, as power relationships are being reshaped. Individuals are affected by the liberalization of electricity markets, but may be non-plussed by the rents accrued to the industry in return for more expensive electricity bills for the citizens. The road to sound energy governance may by hampered by the guardians of national champions, and the wealth of the nation decreasing as a result of a change in the provision of energy supplies. Faced by a choice between military intervention in a large oil producer and domestic turmoil in a country, upon whom you depend for energy imports,do you promoteuniversal values and demand regime change in a situation of disruption of supply and an advanced nuke programme in the region, without consideration being given to military capabilities and the impact of the use of military means on spending programmes and that country’s domestic set-up, even as companies anticipate price hikes at the pump. When EU harmonises energy taxes by 2013, a more equitable distribution of wealth are induced between producers and importers, yet the consumers may not benefit amidst increased demand, and when the rent is instead shared amongst companies and the producers, without the necessary funds being allocated for affordable and clean energy.In short, the political economy of state-market relations in the energy field has become a much more dynamic, inherently global as well as an interdependent one.
But “what” and “how” will the International Political Economy of the Energy of the 21st century change as a result of developments in the European Union ? What will determine the price of oil ? Who or what are the dynamics ? Is the industry the true policy drivers ? Or is the industry structure once again driving deliberate positional strategies that determine organisational structure at inter-national level or do regulatory authorities still have a say ?
Central to these questions are the issue of governance. As Benjamin Cohen has put it:”governance offers one way beyond a dualistic and restrictive perspective on globalization….It highlights a shif-ting of the location of authority in the context both of integration and fragmentation….states and markets are best seen as part of the same, integrated ensemble of governance, not as contrasting principles of social organization”. Cerny (2002:198ff) expands on this, delineating three levels, at which analytical distinct governance structures of markets, hierarchies and networks are enmeshed in the present era. These are first and foremost generically generated market structures, socially chosen or constructed markets within a normative context or more elaborate distinct modes of or-ganisations within companies and firms and theinteraction with wider social and political structu-res on a transnational scale. In addition, Cerny pleads for focusing on analytical lenses institutio-nalized towards third level governance structures, involving the transnational cross-cutting affilia-tions between markets, hierarchy and networks. The European Union very much offers a highly institutionalized framework at the nexus of such interactions, providing vertical order into the energy policy architecture of the European Union.
In the hope of developing a more coherent understanding of the integrated ensemble of energy go-vernance in Europe and its practice, this manual takes its starting point from Cohen-Cerny’s per-spective ( Cohen, 2001) on “ “who” and “what” exercise authority as its narrative device: Issues of regulation will be taken up first, then matters related to the industry structure & corporate strategies of the big players in the energy markets before we delve into forces, exercising authority in the energy markets. The narrative thus provides both structure and theme to the reader, which exami-nes the emergence of authority in the context of the evolution of energy governance structures in the European Union that at the same time allows for an in-depth study from aplethora of scholarly per-spectives. Common ground is the acceptance of the interconnectedness of energy governance, the need to take the interactions between market and regulatory agency at face value and to evaluate on our Union’s approach to IPE problems in the world of energy.
If Clement Henry & Kate Gillespie’s reader Oil in the new world order , who suggests a new oil regime is in the making in terms of either a new international cartel, the regionalization of oil mar-kets or a hybrid international market regime, is the spiritual father of this book, this projet offers a tour d’horizon of the contemporary state of the political economy of European Energy Affairs in order to arrive at a fuller understanding of what EU can bring to bear on the tug-of-wars in the ener-gy markets ( Henry & Gillespie, 1995, Mommer, 2002). Rarely, however, has the dynamics of Eu-ropean energy governance been contemplated from an IPE perspective in a single volume. Gover-nance and Energy – ecclectic, interdisciplinary and holistic this is our contribution to the discipline.
Why is that interesting ? First, the toll of a whopping 70% project import dependence of the Euro-pean Union, and 60% of energy dependency rate of the U.S. could have a potentially disruptive effecton world politics and the transatlantic partnership. For the U.S. the challenge is to move be-yond rhetoric and to action, California’s decision to rely on renewable energy being a case in point. For the European Union -as always - the problem is about the memory of war in the state-system, sound regulation,to think and act on a continent-wide basis , as well as to carry through.This is so much more relevant, since EU from being 64% dependent on domestic coal production for provi-sion of energy, now imports 65% of its energy products. And so, a legal basis for drawing-up a policy for energy security supply has existed in the field of uranium security supply since the 19-70’ies, operated by Euratom and EU’s agency for uranium supply, aiming at equal access and the formulation of a common supply policy.This motive, the management of war and peace, tends now to be obscured.
First, the distinguished members of academia have increasingly turned to analysing EU energy policies. Haaland Matlary (1997) suggests EU policy-making is a result of a pluralistic process, derived from the internal market programme, and hence ‘may be’ characterised by endogenous interest-mediation, where “interests are generated by the policy-process itself” and less by the threat of the disruption of supply. This misstates the origin and history of EU’s foray into the energy sphere. Mitchell, Beck & Grubb (2000) suggests the present geopolitical dynamic is premised on the promotion of stable conditions for the flow of cross-border investment and technology, broade-ning of participation in arrangements to alleviation temporary disruptions of energy supply, esta-blishment of stable conditions for Russian gas & oil exports to Europe and the development and export of Caspian oil & gas, provision of a framework for investment to expand gas supplies to East Asia, the develop-ment of more widely acceptable options for nuclear power and agreement on shared policies to mitigate the risk of climate change. They proceed to an interesting regional ana-lysis. Chevallier (2004) captures the economy of deregulation in terms of industrial supply chain-economics, suggesting a political trade-off is at the origin of EU’s forays into energy policy. His thesis is that supply chain economics and change in business models will help solving the challen-ges facing Europe. And so, a logic of energy markets plus complet, plus complexe needs better regulation. Valerie Marcel and John Mitchell (2006) in Oil Titansaddresses the important question of how national oil companies have started to join forces within a globalizing US-led international order in terms of adaptation to a new social environment, demanding a greater share of the oil wea-lth to accrue to their population. At the same time, they are reflecting upon the environment – na-tional and international one – in order to sustain and renew their competitiveness as driving forces of the modernisation of their economies. Henningsen (2006) diplomatically reminds that the ele-ments for a an oil policy are: the rise of global resources, the political, technological and economic ability to bring the resources to market and the development unrestricted or influenced by policies of global demand.Haghighi (2007), in turn, suggests policy should be organised around ‘a triangle of economics-politics-development’. The analytical focus is a legal-descriptive one, as he exhort-tates for a closer realignment of political, legal and economic approaches to form the foundation of EU energy security of supply policy at the crucibles of internal and external dimensions. The result is an informative study , as he calls for rapprochement between WTO and EU on energy affairs and a greater diversification of economies. Shaeffer (2009) maintains that “A country’s abilities to ac-cess energy supplies and the ways in which it uses energy crucially determine the state of its econo-my, its national security and the quality and sustainability of its environment. The prevailing life-style and structure of global society today is that of hydrocarbon man” – and the way hydro-carbon man produces goods, wages war, and even finds entertainment is dependent on regular access to fossil fuels. Moreover, for energy exporters and important energy-transit states, energy supply poli-cy is as much part of the policy arsenal as other economic tools, military power and diplomatic tactics. States are more likely to refrain from using energy to promote their policy goals than to ignore economic or military means of doing so. These states have particular leverage in a tight world market, since oil prices are especially sensitive to political developments. Oil prices can also be affected by domestic develop-ments as well as intentional foreign policy strategies”……She adds that infrastructure projects link states and reflect relations. Thus, states in choosing routes to export their commodities and import their energy supplies naturally consider and promote the poli-tical ramifications of various route options. Decisions on natural gas projects are especially likely to be affected by political considerations because they can be quite risky. She endorses purely econo-mic rationales to inform decision-making on pipe-line diplomacy, and recommends dialogue be-tween the United States and the European Union on governance in Azerbaijan and Nigeria.
Youngs (2009) is concerned about the evolution of EU energy policies and studies the relationship between energy security and European foreign policy. An adherent of studying the CFSP in terms of EU’s impact on the outside world, Youngs advances an argument about EU’s impact on the producer state’s system of governance. He offers a philosophy of EU as an aristocracy with oligar-chic and democratic deviations. His point is that for EU to make a difference, the relationship be-tween EU and the corporate world will have to undergo change. This is seen by the state, as well as other institutions, as posing a threat, albeit the actorhood of EU suggests European energy gover-nance need not be a violent one. And so, EU’s burgeoning trade relationships will be enriched by a more stable and better integrated energy policy at EU and Member State-level. Goldthau & Witte (2010) correctly points out that energy markets have become ever more global, and makes several apposite recommendations to ensure institutions matches the consolidation of state companies. They call for a strengthening of institutions in EU energy governance, and approximate a definition of the role of institutions in energy governance in terms of rule-setting. And so, proposals are rehashed for better and more transparent investment frameworks, Chinese membership of the International Ener-gy Agency along with a call for more transparency on company decision-making on oil exploration as well as state licensing in combination with a sound integration of the externalities of electricity production into policy. This leads them to put great faith in institutions in cutting slack in Member States for the benefit of ensuring functioning energy markets in the European Union.
Second, the Treaty of on the European Union, draws-up provisions on the establishment of a Euro-pean energy policy, focusing on the functioning of the energy market, the Union’s energy security of supply, the promotion of energy efficiency and energy saving, development of alternative energy sources as well as the promotion of interconnections of energy networks. The Lisboa Treaty even authorizes the Council ‘to decide , in a spirit of solidarity, between Member States, upon the mea-sures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy”. The Lisboa-treaty also contains provisions, allo-wing for the insertion of investment clauses into the agreements with third countries, which could, in time, lead to linkages being made between investments into production capacity and the develop-ment of the overall relationship between third countries and the European Union. The welding of EU’s internal policies is perhaps the biggest challenge for EU, and planning continent-wise for functioning energy markets is a long-term endeavourand per force one to be undertaken in coope-ration between EU and MemberStates.
Third, the Council early on agreed on a procedure, authorising a comparison of oil prices, paving the ground for harmonisation of energy taxes and comparison of oil prices in Member States as well as an estimation of total supply costs throughout the EU[1]. This came with regular consultations be-tween the European institutions along with a call for clarity about the roles and responsibilities of all players. The European Parliament soon weighed-in, invoking a common EU energy tax, in re-turn for which Germany could be brought under a common energy policy[2]That is to say, the ratio-nale of EU policy is to persuade Germany of a reasonable attitude in order to prevent the formation of a gas carteland relieve the rest of high oil prices. On both scores, EU policy must be judged. , This implication is and was a need for a more equitable attitude towards OPEC, departing from a harmonisation of EU energy taxes. At the crucibles of the rise of the price in crude oil, refining and distribution margins and the taxation of oil products, EU were to face up to its challenges of EU energy supply within a new market context, the Commission now underlined: Was OPEC a cartel and oil an inherently political commodity or were the world entering a period of stable prices, re-flecting a market which has become competitive ?, the EU Commission[3]next asked ?Upon enlar-gement, the Commission then reiterated the need to “address infrastructure issues on a regional le-vel, sources of energy geographically and technologically broaden the basis for energy trade in the European continent and its adjoining continents” (EU COM, 2003). An emphasis on gas in diversi-fying Europe’s gas supplies and at the same time ensuring a more seamlessly integrated global energy market did not escape legislator’s attention, albeit this then raises new concerns related to the formation of rent-seeking behaviour. Hence, the European Commission’s call for a ‘long-term ambitious framework’ to rise to Europe’s challenges in the world’s energy markets, underpinned by ‘achieving an energy efficient Europe, building a truly pan-European integrated energy market, empowering consumers and achieving the highest level of safety and security, extending Europe’s leadership in energy technology and innovation and strengthening the external dimension of the EU energy market’ (EU COM, 2010). The European Commission has now started to consult on a coherent policy on EU’s external dimension, signalling a will to form a consensus on the environ-mental, economic and security costs of the external dimension of EU energy security ( European Commission, 2002 ,2010, Locatilli, 2004).
The Council-Commission and the High Representative wanted to formulate principles for the conduct of policy-making: (1) Promoting transparency and improved energy governance in the energy sector through energy partnerships with third countries, the objective being to create mutual-ly beneficial, open, transparent, non discriminatory and stable legal conditions for energy invest-ment and trade (2) Improving production and export capacities in producer countries and develop-ping and upgrading energy transportation infrastructure in producer and transit countries (3) Impro-ving the climate for European companies’ investments in third countries and opening up the produc-tion and export of energy resources to EU industry (4) Improving the conditions for trade in energy through non-discriminatory transit and third party access to export pipeline infrastructure (5) enhan-cing physical and environmental security as well as the energy infrastructure safety (6) Encouraging energy efficiency, use of renewal energies including bio fuels, low emission technology and rational use of energy worldwide (7) Implementing the relevant Kyoto protocol mechanisms (8) Diversify-ing energy imports by product and country (9) Creating an international regime for the supply of enriched uranium to countries that have chosen the nuclear option, in line with non-proliferation commitments and taking into account the EURATOM treaty provisions (10) Promoting strategic reserve stock holding with partner countries. These principles were to lead to functioning energy markets and to diversification in energy supply ( Council-Commission, 2006). It is then easy to understand, why gradualism is asserted as a principle of evolution of policy[4], the involvement of IEA is invoked in order to make the Europeans get their act together (IEA, 2008), as are trans-parency and efficiency in European energy markets. Indeed, policy-makers, today, are obliged to keep the oil price low by procedures, principles andforms of cooperation.