Could a cartel of large energy consumers reduce oil and gas prices? | Energy industry


EEnergy prices are soaring as the world grapples with the economic ramifications of Russia’s invasion of Ukraine, supply chain bottlenecks and the lingering effects of Covid-19 lockdowns. But Italian Prime Minister Mario Draghi has a plan.

The famous former president of the European Central Bank recently raised the idea of ​​creating a “cartel” of oil consumers during a meeting with Joe Biden. Just as the biggest oil-producing nations team up in OPEC to agree annual oil production quotas, Draghi suggested big energy consumers join forces to increase their bargaining power.

He suggests two options: either “a cartel of buyers” working together to negotiate prices, or a “preferred path” to persuade OPEC and other big producers to increase production.

Draghi and the US president also discussed putting a cap on wholesale gas prices, an idea pushed by Italy within the EU over the past three months – albeit with little details of how it would work in practice – but opposed by Germany, the region’s biggest importer. of Russian gas. In what the Italian press called a “small victory”, Draghi managed to raise the topic for discussion at the European Council meeting to be held in Brussels on Monday and Tuesday.

“It will be discussed, and there is the possibility that the commission will then have the task of verifying the conditions of [such a scenario]Paolo Gentiloni, European Commissioner for the Economy, told reporters in Rome on Monday. “But I don’t think a decision [on a gas price cap] will be done in these two days.

Before the war, 40% of the EU’s gas and 25% of its oil came from Russia. Italy has made the cap a priority as it seeks alternative sources for its energy. The price of gas imported from Russia has risen from €20 per megawatt hour before the invasion of Ukraine to €120.

Since September 2021, the EU’s four largest economies – Germany, France, Italy and Spain – have each spent €20-30 billion to artificially lower gas and electricity bills , as well as gas and diesel prices, according to Brussels think tank Bruegel. These subsidies undermine EU support for Ukraine by contributing to Moscow’s financing, draining public finances and harming the environment.

The way to reduce inflation is to directly tackle the problem of high gasoline prices, said Francesco Giavazzi, Draghi’s economic adviser. “The fact is that all forms of energy, whether from renewable sources or from Russia, are currently priced the same,” he said. “What you have to do is separate the different prices depending on the energy source, and that’s proving difficult.”

Russia uses a small fraction of its gas on its territory and sends most of it to Europe via gas pipelines. Once gas starts flowing from the wells, you can slow the flow but not stop it. “The position of the supplier, Russia, is therefore relatively weak,” Giavazzi said. “They could burn the gas in the air but it would cost them a lot, like a big penalty.”

Italy managed to rally many EU states for a price cap, including France and Spain, but not the Netherlands or Germany. Roberto Cingolani, Italian Minister for Ecological Transition, said: “Countries that oppose [the idea] defending the concept of the free market… this free market has made it possible to multiply gas prices five or six times without there being a real physical reason, for example a shortage, which has affected the cost of electricity. Citizens are unable to bear the costs and businesses suffer from the high energy costs of manufacturing.

Yet the EU executive has rejected a cap. In a guidance document last week, the European Commission argued that the proposal should only be a last resort in an emergency, such as Russia cutting off all gas to the EU. He appears to have been swayed by analysts saying the caps could jeopardize EU climate targets, by blunting the signal to consumers to reduce energy demand.

Meanwhile, the proposed oil buyers’ cartel, no longer a priority for the United States, is only at the idea stage, but could become a mechanism to convince OPEC to increase production if the EU decided to block Russian energy imports.

Currently, the EU is more focused on creating a cartel of gas buyers. European leaders agreed in March to buy gas together to use the leverage of the union to secure better prices. “We have significant leverage,” said European Commission President Ursula von der Leyen. “So instead of outbidding and driving up prices, we should be pulling our common weight.”

The EU “platform for the joint purchase of gas, LNG” [liquified natural gas] and hydrogen” launched last month and will relate to the voluntary common purchase of gas, with the priority of ensuring the filling of storage. EU gas storage fell to unusually low levels last winter, a factor seen as exacerbating soaring prices and rising bills. Eventually, the group will also focus on hydrogen and renewable energies, even if the details remain unclear.

The EU consumes three quarters of the world’s gas pipeline and 16% of the LNG transported by ship. Inspired by the example of the EU buying Covid vaccines, proponents argue that EU procurement could ensure security of supply and provide greater price transparency. However, many details remain to be settled.

It remains unclear whether all 27 EU member states will join or how easily they could opt out of existing gas contracts. And the EU still has to agree on a law allowing it to buy energy together, which will also have to circumvent one of the EU’s raison d’être: to break up cartels.

Having the EU negotiate deals for private or state-owned companies raises antitrust concerns, as it would put those companies dealing with the cartel in a privileged position over outsiders. “We have a strong antitrust authority in Europe,” says Simone Tagliapietra, senior researcher at the Bruegel think tank. “Now how can you create a cartel to buy gas? The only way to achieve this is probably to base the initiative on energy security measures.

Meanwhile, other plans to rein in the price of crude are gaining momentum. German Economy Minister Robert Habeck said last week that the commission and the United States were working on a proposal to cap global prices.

Michael Bloss, a Green MEP from Germany, said the EU should create an oil consumer cartel with other developed countries including the EU, US, Japan, South Korea and the UK. United, which account for “a huge share of oil consumption” in the market. global market. “If they say together that’s the price we’re going to pay, but no more, the sellers, they’ll have to comply… This special time requires special action.”

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