When Russia temporarily cut off gas supplies throughout the Ukraine at the beginning of this year, gas prices in Europe jumped to an alarmingly high level, bringing into question the European Union's (EU's) current attempt at liberalizing gas markets.
As part of a 10-year plan, the European Commission set a goal of liberalizing the European gas market by July 2007. But there has been much debate about this liberalization, and in light of the Russian gas scare, a need to stabilize the European gas market has been given new priority. Additionally, given the current trend of sluggish liberalization, it is highly doubtful that this goal will be achieved on time.
The European Commission argues that in order to attain lower and more stable gas prices, Europe's gas markets should be liberalized - and thus, become more competitive. This change would allow producers to compete freely within and across national borders.
On the other hand, opponents of this liberalization movement - dominant gas companies and state governments in particular - claim that the long-term security and stability of gas prices can only be achieved by managed national markets that are dominated by strong quasi-monopolistic companies. Such national markets, they say, would be better fit to withstand sudden shifts in supply and demand.
Those in favor of a liberalized European gas market have used Britain's open gas market as an example in favor of their case. With six major gas companies competing within its market, Britain's gas prices have been among the lowest of all European countries.
According to Ofgem, Britain's energy regulator, competition has been good for consumers. British consumers have consistently paid lower gas prices over the past 14 years than most other Europeans.
But despite Britain's fairly low gas prices, proponents of closed markets would argue that it is still caught between its own liberalized market and a European continental market. This means that Britain, by not being a self-contained market but being part of a closed European market, is not paying "actual" prices for gas because it is isolated from supply-and-demand, which is open to manipulation by big suppliers. This could result in Britain paying 10 billion pounds ($18 billion) extra for gas this year.
Thus, given Britain's situation, it would seem that Europe should set off on a faster pace towards liberalization. Even though the European Commission has been pushing for liberalization of the gas markets, it is important to look at why this process has been very slow, and why it has been met with opposition.
One of these reasons is deliberate state interference motivated by the desire to build strong national competitors. Historically, energy policy has always been an issue dealt with by state governments. In past years, France and Germany have complied only minimally to EU regulation requirements. Three years ago, despite numerous arguments by the Cartel Office and the Monopolies Commission, Germany allowed the merger of the nation's biggest gas company, Ruhrgas, and electric giant E.ON. This merger had the blatant goal of creating a national competitor to France's major gas company, Gaz de France.
In addition to state interference, big companies themselves do not want to see open markets where smaller competitors could drive down their high prices. Another issue is that dominant companies in France's energy market have made the case that their prices are much lower than Italy's gas prices, despite the fact that Italy has opened its borders to outside competition.
State interference, however, is not the only reason why liberalization of the gas market has been hindered. If markets are to open up, major changes in infrastructure need to occur. Big companies would not be willing to take on the costly engineering challenges of creating new transportation links, such as pipelines, between countries.
Not only would these new links be costly, but there is little incentive for big companies to get rid of cross-border networks. With the current weak cross-border networks, dominant companies face weak price competition.
Lastly, the argument has been made that even if markets are opened for small competitors, these smaller companies would not be willing to engage in 10-to 15-year-long projects to finance new transportation links.
Additionally, the power of the authorities in Brussels to intervene in state actions is rather limited. Liberalization really depends on national governments. According to Rafael Miranda from Endesa, a major Spanish gas company, local regulators have a deep distrust of a wider, open market. These local regulators, in part affiliated with state governments, do not feel a need to give into the pressures of Brussels.
This tension between national governments and the authorities in Brussels is not unprecedented. The question of a liberalized European market only further complicates the preexisting conflict of power between the European Commission and its states.
In May 2005, when the constitution of the European Union was brought to a vote, it was not ratified by France or the Netherlands. Both countries felt that they would lose too much power to a strengthened central government and that they would prefer a much more decentralized and looser European Union.
Interestingly, since May 2005, other countries - like Poland and the Czech Republic - have also expressed reluctance towards the establishment of a stronger central European government. Czech president Vaclav Klaus stated that he personally prefers inter-governmental integration, but rejects the trans-national European Union institutions.
Thus, it is very interesting to see the European Union, a symbol of unity and strength, show signs of weakness as states are showing an unwillingness to comply. Furthermore, the issue of a shortening supply of energy cannot be solved by a fragmented Europe. Even though the European Union is strong on many fronts, it is weak on energy. It may be difficult for the European Union to continue as a major global competitor if it is unable to reach an agreement on the energy front.
