Why Europeans remain calm as oil prices soar

Posted in Europe | 01-Jun-04 | Author: Mark Landler| Source: The New York Times

FRANKFURT Alexandra Krauter paid little attention as the digits on the gasoline pump flashed upward. Krauter, a 29-year-old woman who works in a Frankfurt restaurant, was not even sure how much she was paying (E1.15 a liter, the equivalent of $5.31 a gallon).

"I don't think the price is appropriate, but I don't care that much about gas prices," Krauter said, as she waited restlessly beside her pint-sized Fiat. "I've got other things to worry about."

Few Europeans are as nonchalant about the sky-high cost of fuel as Krauter. But her attitude gets at a basic difference between the ways Europeans and Americans view the current spike in the price of oil.

While the arrival of $2-a-gallon gasoline has rattled many Americans, reviving memories of the oil shocks of the 1970s, Europeans have reacted with relative equanimity. Gasoline is so heavily taxed in most European countries that a jump in the market price is less noticeable.

And Europe has been insulated by a strong euro, which has helped it in the dollar-dominated oil market. That might ease the effect of any price surge this week, following the attack by militants on a foreign residential compound in Saudi Arabia.

Moreover, Europe, after three decades of seeking alternatives to oil, is somewhat less vulnerable to the effects of higher crude prices. Oil and natural gas still lubricate Europe's economy, to be sure, and industrial countries like Germany remain among the world's largest importers.

But for a variety of reasons, ranging from smaller cars and shorter commutes to the windmills that dot the countryside from Denmark to Spain, Europe does not view $40-a-barrel oil with the same alarm as the United States does. Indeed, some in Europe see the situation as a chance to redouble Europe's campaign to wean itself from fossil fuels.

"We talked about high oil prices in the past, but it was hypothetical," said Peter Ahmels, the president of Germany's Federal Association on Wind Energy. "Now people are asking, 'Could the oil supply run out?'"

In 2000, a rise in the price of fuel was compounded by higher taxes, which ignited protests and blockades by truckers from Britain to Germany. This time, officials in Europe hope, the high prices will rekindle an appreciation for windmills, solar panels and other alternative energy sources.

Germany is the world's largest producer of wind energy, with 15,800 turbines generating 15,000 megawatts of electricity, or 6 percent of its total supply. But parts of the country, notably Bavaria, have been loath to build windmills because of complaints that they blight the landscape.

Now, with higher oil prices, those objections may lose some force. "It's one very strong point for us," Ahmels said.

The use of solar energy is also growing, with the production of solar cells almost doubling last year. The German solar-power industry, which is heavily subsidized by the government, will generate more than E1 billion ($1.2 billion) in revenue in 2004, according to an industry group.

Europe's push for renewable energy began as a response to the 1970s oil shock, which was as traumatic in Europe as in the United States. Over the years, however, the campaign for clean energy has been driven less by fears of dwindling oil than by a desire to protect the environment.

In Germany, the Green Party, far from being a lobbying group on the sidelines, is part of the government. Germans accept, as an environmental imperative, things that Americans would find bizarre - like paying 70 cents of every euro at the pump in the form of taxes, to drive down fuel consumption.

"It is a Green position to force an energy policy which reduces our dependency on oil," said Rezzo Schlauch, a Green Party member who is state secretary in the ministry of economics and labor.

For all the talk of living with less oil, there is evidence that Europe could use a kick. The European Union set a target of producing 22 percent of its electricity, and 12 percent of all its energy, through renewable sources by 2010. But Brussels admits that it will miss the target unless its member states increase subsidies and other forms of aid for the industry.

Without more support, the commission said, renewable energy will account for only 10 percent of total energy production by 2010. It currently accounts for 6 percent, compared with 40 percent for oil, 23 percent for natural gas, 16 percent for nuclear power, and 15 percent for solid fuels.

While wind energy is growing in Germany and Denmark, it has been hobbled in France because the electric utility does not want other energy companies using its power grid. In Britain, until recently, builders of windmills could not obtain permits from local authorities to erect turbines.

A long-term increase in oil prices could sweep aside many such objections, advocates of renewable energy contend.

Europe, despite its progress in developing alternative energy, remains heavily dependent on imported oil. Moreover, close-at-hand fields in the North Sea and Norway are peaking in production, which means Europeans face a future of even greater reliance on imports.

Political leaders in Europe have been no less vocal than their U.S. counterparts in calling on the Organization of Petroleum Exporting Countries to increase oil production when it meets in Beirut this week. That could bring down prices, which peaked at $41.85 a barrel on May 17 and are now just under $40.

"There is a point in leaders' saying, 'There's no need to overreact,'" said Thomas Mayer, the chief European economist at Deutsche Bank. "The effect of this is much less than in the 1970s."

The question is how much a sustained price rise would hamper Europe's already anemic economic growth. The rule of thumb, Mayer said, is that an increase from $30 a barrel to $40 a barrel would trim 0.4 percent from annual growth. That is a significant bite, given that the European Commission has forecast growth of only 1.7 percent in 2004.

There appears to be little relief in sight for European motorists, so auto clubs in Germany are pushing for a cut in fuel taxes, which are among the highest in Europe.

"The tax is not changing behavior by forcing people to buy smaller cars. It's just forcing people off the road," said Johannes Huebner, the director of communications for the Auto Club of Germany.

European leaders resisted demands to lower taxes amid the protests of 2000, and they are likely to do the so again. Raising gasoline taxes is equally unlikely, given the uproar it caused four years ago.

But officials realize they cannot stand still. "Our sources of oil are in the Middle East, and the Middle East is very unstable," Schlauch of the Greens said. "We have to do things differently."