Why High Oil Prices Are Now Affecting Europe More Than the US

The world is presently sharing a limited supply of oil. When oil prices rise, oil production doesn’t rise very much, if at all.

Figure 1. Brent oil spot price and world oil supply (broadly defined), based on EIA data.

The issues then become: Which buyers get the oil? What uses get priced out of the market?  Which countries are disproportionately affected?

It seems to me that this time around, Europe, and in particular the Eurozone, is the area of the world getting hit the hardest by high oil prices. Part of this has to do with the relative level of the Euro and the US dollar. If we look at the price of Brent oil (a European oil) in Euros (Figure 2), we find that prices are as high now as they were in mid-2008.

Figure 2. Dated Brent average monthly oil prices, expressed in Euros, based on IndexMundi data.

The situation in the United States is fairly different. The dollar-Euro comparison works more in the favor of the US, so that the rise of Brent in US dollars has been smaller this time than in 2008. In addition, refineries in the United States have been fortunate enough to purchase quite a bit of the oil they buy at prices below that of Brent. The issue leading to lower prices in the United States is lack of pipeline capacity, creating a bottleneck for shipping oil to Gulf Coast refineries. (See my earlier articles, Why are WTI and Brent Prices so Different? and Pipeline changes to fix WTI/Brent spread are likely to add new problems.)

Figure 3. Comparison of West Texas Intermediate (WTI) and Dated Brent Oil Prices, expressed in US Dollars. Data from IndexMundi.com.

Figure 3 shows two different benchmark prices of crude oil in the United States: Brent and West Texas Intermediate (WTI). Oil that is imported to the United States from Europe and Africa can be expected to follow Brent prices, as will oil that is produced along the Gulf Coast, and has convenient access to Gulf Coast refineries. Oil that comes from the North, such as crude from Canada and the Bakken, is subject to pipeline limitations, and its price will tend to follow that of WTI (or trade for an even lower price than WTI). Oil purchased by US refineries thus reflects a blend of WTI and Brent prices, and perhaps some lower ones as well. Based on Figure 3, it is clear that the current prices are far below the 2008 price peak, quite unlike the situation shown in Figure 2 for Europe, with Brent priced in Euros.

Availability of Locally Produced Oil versus Imports

Europe’s oil production has been declining since about 2002.

Figure 4. Europe "all liquids" oil production (including biofuels and natural gas liquids) based on EIA data. 2001 estimated based on 11 month data.

This decline in oil production by itself has a negative impact–fewer jobs and less tax revenue.

In comparison, oil production in North America (Figure 5, below) has been much more level, and has even been rising somewhat recently. A rise in US and Canadian production has helped offset a decline in Mexican production. Since the amounts shown are “all liquids,” the amounts shown include biofuels and natural gas liquids, which are oil supply extenders, but are not true “crude oil.”

Figure 5. North American "All Liquids" production, including crude oil, natural gas liquids, and biofuels, based on EIA data. 2011 estimated based on 9 months data.

An even more important issue, though, is that European oil does not benefit all European nations. Instead, it is the countries that extract the oil that benefit, primarily Norway and the United Kingdom. Countries that do not extract the oil must import any oil they use.The countries that import oil generally import natural gas as well, at prices that are partially tied to the price of oil, so they are hit doubly hard.

Paying for these high-priced imports reduces the amount that residents of these countries can be spend on other discretionary goods, and contributes to a tendency toward recession. Furthermore, if a country is not producing oil and natural gas itself, it does not get the offsetting benefits of additional jobs in the oil and gas sectors.

Figure 6. Percent of Energy Consumption from Imported Oil and Gas, for selected countries, based on BP Statistical Data.

Figure 6 shows that the PIIGS countries are all very heavy importers of oil and natural gas. In fact, they are the five countries listed on the on the left of Figure 6, with the highest level of imports. When oil prices rise, these countries are disproportionately affected, because, for example, tourists can no longer afford vacations in their countries. Their debt problems are in part tied in to high oil prices, since when workers are laid off, a country collects less in taxes and needs to pay more in benefits to unemployed workers.

The US has a relatively low level of imported oil and gas imports compared to most European countries. This occurs partly because of its significant use of coal and nuclear, and also because of the large size of its own oil and gas production.

Another factor that helps the United States in dealing with high energy prices is its current low price of natural gas, relative to that of Europe and Japan (Figure 7).

Figure 7. Natural gas prices in the United States, Europe, and Japan, based on World Bank Commodity Price Data (pink sheet)

US natural gas prices are currently extremely low, because of an imbalance between natural gas supply and demand. These low prices for natural gas mean that the cost of home heating and of electricity are now lower than they have been historically in some parts of the country. These lower heating and utility costs help offset the rising price of oil. The issue of why US natural gas prices are so low will be the subject of another post in the near future.

The low price of natural gas also makes the cost of refining heavy oil less expensive in the United States than elsewhere, because natural gas is used by complex refineries that refine heavy oil, both as a feedstock, and to fire the furnace that heats the crude oil. This makes the United States a sought out destination for refining heavy crude oil, and helps add jobs to the US economy. For example, nearly half of crude oil imported from Mexico to the US is exported back to Mexico as oil products, according to EIA data. EIA data also shows that we import crude and export a smaller amount of products back to Canada, Brazil, Ecuador, and Venezuela.  The low price of natural gas is thus a reason US product exports, such as diesel and gasoline, have been increasing recently, even though the United States continues to be a big importer of crude oil.

Nuclear Makes a Difference

The reason why Japan, Germany, Switzerland, and France have as low imported oil and gas dependencies as they do (Figure 6, above) is because they historically have all had very significant nuclear energy installations. If the amount of nuclear energy production is added to oil and gas imports, the resulting ratios are more like that of the PIIGS countries, with imported oil and gas dependencies exceeding 65% of total energy consumption (Figure 8).

Figure 8. Effect of combining nuclear energy consumption with current imported oil and gas consumptions, as a percentage of total energy consumption. (Based on BP Statistical Data.)

If countries with nuclear programs decide to discontinue them, it will be a challenge to find other sources of energy with which to replace the nuclear. While LNG production is increasing, it is doubtful that it can increase enough to match everyone’s needs. Many are hopeful that wind and solar will work as substitute, but this is far from proven. Scale up tends to be very slow.

What is Ahead for the Eurozone?

The Eurozone includes 17 countries that have adopted the Euro. It does not include the major oil-producing countries of Norway and the United Kingdom, and it does not include Switzerland.

Figure 9 (below) shows that the oil supply situation for the Eurozone is very poor. It is pretty much entirely dependent on imports.

Figure 9. Countries of Eurozone, oil consumption of Eurozone (black line), and oil imports of Eurozone, in graph from Energy Export Databrowser.

Figure 10 shows that the natural gas supply situation is only a bit better:

Figure 10. Eurozone natural gas consumption (black line), production (grey area above mid-line), and imports (red area below mid-line). Graph from Energy Export Databrowser.

With no oil supply, and a modest but declining natural gas supply, Eurozone countries can expect to spend more money on oil and gas imports in the future, assuming that they can get these products when they want them.

The Eurozone has the additional problem of having a common currency, but debts entered into by individual countries. Individual countries cannot issue currency. If a particular country would benefit by having their currency have a higher or lower value, there is nothing that can be done about the situation, because the Euro is at a common level for all. So it is easy to reach the situation we are in today, with Greece and a number of other countries near debt defaults, when oil prices are high.

The question going forward, besides the debt problems, is how the Eurozone’s energy problems will be solved. After the Fukushima accident, many are questioning whether nuclear is really a good option. Another option is coal, although it is problematic from a CO2 point of view. There is some coal in the Eurozone, but less than is currently consumed, and extraction is declining each year:

Figure 11. Coal production (grey area above midline) and coal imports (red below midline). Graph from Energy Export Databrowser.

The countries that have banded together in the Eurozone are in a weak position because of their poor energy supply situation. There has been a great deal of work done on wind and solar in the Eurozone, but these still comprise only a small percentage of energy consumption. While many would argue that “renewables” are the way of the future, the fact remains that the vast majority of energy is not from renewables today, and the high price of oil and gas is already causing a problem.

Various policies have been put in place to curb fossil fuel use, but Eurozone countries remain very dependent on fossil fuels. With world oil supply flat, and other parts of the world growing more rapidly than the Eurozone, the Eurozone will need to make major cuts in oil usage in the years ahead. One way this might happen is by one or more countries dropping out of the Eurozone, going back to their old currencies, and letting their currencies devalue. With devalued currencies, these countries will be better able to compete for tourist trade and for export markets. This would leave the remaining Eurozone countries in a less competitive position, however, and make it advantageous for other Eurozone countries to drop out. This scenario would seem to lead to the end of the Eurozone and many debt defaults.

Are Other Countries Better Off for the Long Run?

While the United States, United Kingdom, and Japan would seem to be in better shape, this is not necessarily the case for the long run.

In part, the long run is different because individual situations are temporary. Japan is vulnerable now, with most of its nuclear generating stations down, and the need for more imports of some sort to balance the situation. The United States for now has lower oil prices due to pipeline problems, but these will eventually be solved.

In part, the long run can be expected to be different because problems of one country affect other countries. If there are debt defaults in PIIGS countries, these are likely to affect banks and insurance companies around the world.  Also, almost every country has a debt problem, unless economic growth returns for that country. (The Eurozone is reported to have negative economic growth for the 4th quarter of 2011, and the IMF forecasts it will have negative economic growth for 2012.) If the nations of the world are sharing a virtually flat oil supply, it is difficult for very much economic growth to take place, because high oil prices reduce funds available for other purposes. Need for greater energy resources is likely to lead to more resources of all types (people, capital, and  raw materials) being devoted to creating energy of some type (high priced oil and gas, or substitutes), leaving less for other economic sectors, such as those making discretionary goods.

So in the end, it may not matter which countries were first and most affected by limited oil supply and high oil prices. It will be all of us that feel the impact.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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75 Responses to Why High Oil Prices Are Now Affecting Europe More Than the US

  1. Most of the commentary about oil prices is about its impact on energy and transportation costs. However, as a distributor, many of the products that I sell include a significant plastic content. I am getting a new notice of upcoming price increases from my vendors almost daily. .The inflationary impact will hit the U.S. and Europe across a broad spectrum of products as the cost of oil by products increases as well as the transportation component. Yikes my prices increases are bad enough. I would not want to be in the shoes of my European counterparts if their pice incr3eases are even worse.

    • I am sure price increases of products will be an issue too. The most obvious product that is used in large quantity is asphalt (probably not the product you sell, though). Governments need to repair a lot of roads, and don’t have funds for hugh increases in asphalt cost. They can repair roads with concrete, but this is also expense (but longer lasting). Or they can put some of the asphalt roads back to gravel.

  2. Jeff Morse says:

    Very nice post … again
    I recently discovered your blog and found it very fact centered and balanced. I recently wrote a post at my blog titled “If the US is a now gasoline exporter why high prices?” (http://stormyridge.net/blog/archives/316) which I think lines up with some of your analysis (your analysis is better :).

  3. How many Drachmas per Gallon? Lira/Gal? Pesetas/Gal?

    Europe should be Carz Free in no time here.

    Or maybe they can sell their First Born to Vlad the Impaler over in Mother Russia.

    Energy-Money Equilibrium:Part III


  4. La Curée says:

    Thanks good read, Gail.

    Reading your post another idea struck me I wonder if anyone has seriously considered the point when assignable surplus fossil fuel reserves that are required to decommission and safely bury all the detritus left after the nukes has passed.

    Only one commercial nuke power plant has ever been attempted to be completely cleaned up and that in the UK.
    Given the result the out look is poor!
    30 years and billions of £s still not cleaned up or even fully dismantled.

    The Eurozone I imagine is already in deficit so the future for the Northern Hemisphere seems likely to be as a mutagenic hell hole as one Chernobyl follows another Fukoshima and plants are simply abandoned due to lack of spare energy resources.

    On that cheery note I wish you an enjoyable evening and no dreams of our mutated descendants crawling on perhaps slithering over our past glories ;¬)

    • I am afraid oil production will go down quickly, and we will have a huge number of nukes around the world, all ending up in a similar shape to Fukushima. I’m not sure it even makes sense to talk about the fossil fuels required to decommission all of them, because the cut-off in fuels will be because of multiple financial issues, and happen relatively quickly, rather than the slope Hubbert talked about, (but he assumed that other sources of energy would take over before fossil fuels depleted, with his curve!)

      I have written about the nuclear issue:

      Why oil shortages may make nuclear a less viable option (Written before Fukushima)

      Is Loss of Electricity a Risk for Spent Nuclear Fuel?

      • Owen says:

        Transportation priority in oil shortage environment.

        1) Food
        2) Defense (of food supply, and mouths)
        3) Politicians
        4) Spare parts for nuclear plants
        5) When spare part inventory is depleted, then making new ones falls afoul of failure of the machine tools that make nuclear plant spare parts, and the tools that repair those tools. The priority chain fails.

  5. La Curée says:

    Yes, and its already happening the French are making routine atmospheric discharges from their waste processing that would count as a continuous accident – if the MM reported it.
    Lots of that blows our way.
    ‘We’ have just approved a new generation on the existing sites in England, the Scots are going non – nuke.
    I’m heading south – of the equator if I can long term or at least the North of Scotland.

  6. La Curée says:

    Have you seen this report, lots of graphs ;¬)
    Feasible Futures for the Common Good. Energy Transition
    Paths in a Period of Increasing Resource Scarcities
    Seen here:

    • No I hadn’t seen the report. Thanks for pointing it out! It has some fairly dire forecasts for natural gas availability in Europe, I see, as well as a peak oil forecast.

      Even though the results in many ways look dire, I don’t think that it can capture all of the interlinkages that make the situation even worse than what it forecasts. One problem is that it takes more and more capital and more and more energy to extract the various resources. The world economy cannot really pay exponentially rising costs. So it is the lack of infinite investment capital, and as well as the inability of society to pay the necessary high prices for all of the energy sources and metals that will ultimately cause the system to fail.

      • La Curée says:

        Yes, a strange place to find what is basically a Peak Oil report.
        It is written by a founder member of ASPO.
        Lots of good thinking I like the non native English it adds some freshness :¬)

        Lots of interesting information presented innovatively on oil IMO it is optimistic.
        I like the non-native English gives the text some freshness, the author/s is obviously intelligent and literate.
        ‘It is not unlikely to assume that around 2030 at a world level, oil will vanish or
        2030, might be traded at extraordinarily high prices.
        Possibly, besides small domestic quantities oil consumption in Europe will have ceased or become a luxury product with very limited importance, at that time.’

        From the metals perspectives relating to PM., which is where I found the report so worth considering:
        He is saying that there is an order of magnitude less Ag than Au in terms of reserves and recoverable.
        Combine this with the now mined ratio at 8:1 the manipulated price ratio 50:1 and the little known fact that due to industry use there is less silver than gold above ground he makes a good case for at least the ratio on price terms to fall.
        Want to give something useful a silver eagle would be good on sale ATM.
        Keeps the milk cows product fresh for longer if nothing else, silver dollars in milk bottles c.1920s.

        • I am afraid I haven’t had a chance to read the whole report. I didn’t realize silver dollars in milk bottles were used to keep milk fresh long ago, either.

          • La Curée says:

            Seems I didn’t pay attention when reading it, possibly PM fever ;¬)
            Got my ratios wrong – still 10:1 Ag:Au is a lot less than the current price ratio 50:1 and the stockpile of silver is tiny due to industrial uses.
            So the suggestion is still valid.
            I should write my own piece and contribute a bit more.
            See you in gaps between the 0 and the 1’s.

  7. pjc says:

    Good post!

    However – nuclear being disbanded? Perhaps in Germany and Japan. Certainly not in the US (which recently approved some new nukes in GA, and both Romney and Obama support nukes). Certainly not in China, which is building nukes at a frantic pace.

    Also, “if global growth returns”? Both 2010 and 2011 saw strong growth in global GDP. GDP growth was still anemic in the US.

    The Eurozone might have more and more problems going forward, and a European recession will still impact global GDP. But global GDP has been incredibly resilient over the last 12 years, recording strong gains in 9 out of 12 years, and going negative only once. I think comments like “if global growth returns” sound pretty uninformed in this context, and don’t do you any credit.

    • Gary Peters says:

      In making forecasts of any sort for future energy needs in parts of Europe and elsewhere you need to consider that several major energy-consuming nations are now, or soon will be, facing population declines. Japan, Germany, and Russia are good examples.

      • Population declines are good in some ways, but if countries have made big pension promises, these become very difficult to fund. Essentially, they have promised retirees a share of energy resources, even if there aren’t enough energy resources in total.

    • Switzerland has also announced a nuclear phase-out. I don’t think I made any suggestion of a phase out in the United States or China. China wasn’t even on the graph in question. It has been very close to self-sufficient in energy, but is gradually becoming an importer.

      I am not aware that I said “if global growth returns”. What I did say was, “Also, almost every country has a debt problem, unless economic growth returns.” Here, I was thinking of the Eurozone, and the fact that in the fourth quarter of 2011, their economies were said to be shrinking in total. The IMF forecast is for the Eurozone to shrink by 0.5% in 2012. I hadn’t thought of your interpretation. I can change the wording to make it clearer.

      • pjc says:

        Certainly the Eurozone is going to struggle with high energy prices, and no-one is expecting great things for their economy anytime soon.

        But global GDP and US GDP are different questions entirely.

        Your analysis seems to imply the US is sitting pretty – reducing oil imports, increasing the refinery business, ramped up domestic drilling, and enjoying a competitive advantage for industrial energy in general. The business whereby high oil prices leads to increase shale fracking leads to surplus natural gas leads to further decreases in natural gas prices is interesting and unexpected, and also very beneficial to the US economy.

        An interesting graph would be net-oil-imports-per-capita. This will also show that the US is much less senstive to high oil prices than people think. A robust domestic oil industry offsets some of the pain of high oil prices, by ramping up employment in the oil patch. Coupled with cheap domestic gas, and this “price squeeze” is entirely different from the pre-shale-oil 70s and still-high-natural-gas 2008 bumps.

        • The US is doing relatively better than Europe, but we are all tied together financially. I am not sure we can avoid international contagion, through the bank system.

          If you look at the parts of the USA that are doing well, it is clear that having a robust oil and gas industry in an area definitely helps.

          The problem with comparing per capita oil imports is that they really need to be matched against per capita income. Per capita income tends to be associated with total energy consumption. So showing oil and gas imports as a percentage of energy consumption gets at this idea, if both oil and gas are high-priced. Maybe one of these days I will look at the question another way.

          • pjc says:

            ” I am not sure we can avoid international contagion, through the bank system.”

            If there is a messy default in Greece or a default of Italy than perhaps there will be trouble.

            But it still looks like (a) the global poor are industrializing and need energy, iPhones, Facebook, etc. and (b) the US is the industrialized country best poised to provide these things. (Canada and Australia also look pretty good).

            “The problem with comparing per capita oil imports is that they really need to be matched against per capita income. Per capita income tends to be associated with total energy consumption.”

            Meh, this looks like some sort of circular reasoning to me.

            At a minimum, you should like at the “net energy trade balance” … include among US exports refined oil products AND coal. The latter consistently gets overlooked, but coal exports from the US are now quite significant.

            Of course a “net energy trade balance” would be a bit tricky, since you’d be comparing radically different types of fossil fuels. But it would still be interesting .. you could dollarize, or use BTUs.

  8. Pingback: Dure olie raakt Europa harder dan de VS « Cassandraclub


  10. Bill says:


    The chart of EU imports – which have declined since 1979 if I read it correctly, is disturbing in that the EU migrated away from what large vehicles it used rapidly, and switched to diesel too – and therefore now have little room left to increase efficiency in private transport. It’s much easier to go from 9mpg to 40mpg than from 40mpg to 80mpg.

    • That is one of my concerns as well. If you want to have resilience in a crunch, you don’t want to pump every bit of “fat” out of a system, early on. You want to leave the situation somewhat lax, so that there are ways to cut back when you need to.

      I think that the powers that be in the Eurozone realized a few years back what poor shape they were in energy-wise. They decided that they really couldn’t afford to ramp up imports, so they needed to find ways to keep imports from rising. That is when the gas tax idea came along. Climate change was given as a reason, because it was a concern, it was conveniently far away in timing, and didn’t admit any weakness on their part. But a big part of the reason was concern about imports and balance of payments. Maybe a few were concerned about the long-term oil situation as well.

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