Europe’s energy security: challenges and opportunities

GAWDAT BAHGAT Several geopolitical and economic developments in the first decade of the twentyfirst century have heightened Europe’s sense of vulnerability in respect of its energy supplies. On the supply side of the energy equation, the continuous fighting and rising ethnic and sectarian tension in Iraq, and the diplomatic confrontation over Iran’s nuclear programme, have intensified concern over the stability of supplies from the Persian Gulf. On the demand side, China’s and India’s skyrocketing energy consumption and their efforts to secure supplies have intensified global competition over scarce hydrocarbon resources. These changes in the landscape of the global energy market, in conjunction with diminishing refinery capacity, shrinking spare capacity and a low level of investment, have driven oil and natural gas prices higher. Currently, the European Union’s oil bill (for imported and domestically produced oil) stands at around €250 billion a year, or roughly 2.3 per cent of gross domestic product (GDP).1 These soaring prices have exerted tremendous pressure on European economies and underscored the need for a common European energy policy. The dispute between Russia and Ukraine over natural gas prices in January 2006 further highlighted the risks of dependence on a few energy suppliers. In early 2005 the Russian state monopoly, Gazprom, announced plans to start applying ‘market rules’ in its gas dealings with former Soviet republics. That meant that buyers would lose the heavily subsidized prices they had previously enjoyed and instead would have to pay similar prices to those charged to west European customers. It also meant that all bills would have to be settled in cash instead of through barter agreements. This new policy was largely seen as a punishment for the Ukrainian President Viktor Yushchenko, who