Many policies have the potential to contribute to reducing the impact of the oil price on energy prices in Europe. The strongest impact is through oil-indexed gas contracts linking gas prices to the oil price. All measures targeted at reducing oil indexation will thus make contributions towards a decoupling of EU energy prices from the oil price. However, the extent to which different policy options have the potential to contribute to reduced oil indexation, and the speed at which effects take place, requires detailed analyses, which are beyond the scope of the present study.
Parallel developments of gas spot prices and oil prices show that the two fuels have certain price drivers in common. When both markets are decoupled and prices develop individually, four different scenarios are possible: oil and gas prices increase or decrease in parallel, or oil and gas develop in opposite directions.
In essence, the challenges of indexation are linked to the evolution of oil prices and gas prices on the market. The market situation since 2010 is characterized by high oil prices and lower gas spot prices compared to indexed prices. However, a relaxing of the oil market and a tightening of the gas market can reverse this situation. Reduced oil indexation, e.g. by indexing to the hub price of gas instead of oil, is therefore not a guarantee for lower prices in the future, although currently it is more favourable146.Policies promoting energy efficiency and renewable (domestic) sources of energy reduce the import dependency of Europe, and reduce fossil energy demand on the global market. Both have positive economic consequences, and both reduce the impact of the oil price on EU energy prices. However, in the short-term, their impact on the translation of oil prices on European energy prices may be rather limited in quantitative terms. The European 20% energy savings target until 2020 can be achieved at net cost savings for the investors of efficiency measures and reduces CO2 emissions, thus providing multiple synergies. In the long-term, energy efficiency and a high share of renewables will practically eliminate the impact of the oil price on energy prices entirely.
In addition to promoting renewable energies, many different policy options can support the diversification of energy sources. Most notably, new gas infrastructures will allow certain Member States to diversify their supply base from the current monopoly situation, and will increase the liquidity of gas hubs. As infrastructure development is a slow process, this option will not have large impacts in the short-term.
Energy taxes are an important source of income for public budgets, and provide for an important instrument to influence energy consumption and choices of energy carriers.
Furthermore, energy taxes allow stabilizing energy prices of final consumers while ensuring price signals to be felt. Higher energy taxes limit the relative impact for consumers of unexpected increases in energy prices147, while giving incentives for an efficient use of them.
In conclusion, the set of policy options available for reducing the impact of oil prices on European energy prices is large. Most of these policies will have other desirable effects in addition, including increasing security of supply, supporting climate protection, improving the competitive situation of European industry, creating employment etc.
146 Various alternatives to oil indexation exist, including but not limited to indexation to gas hub prices as discussed in section 2.3. Alternatively, contracts could be short-term rather than long-term, which includes the flexibility of the buyer to change the supplier, but includes a high level of uncertainty of the long-term demand for suppliers and thus reduces the incentive to invest in capital intensive pipeline projects. Long-term fixed-price contracts have a high predictability of fixed-prices, but include the risk of changing market conditions such as the availability of lower prices substitute fuels.
147 In a high energy retail price environment, absolute price jumps represent lower relative changes than in a low price environment. As relative changes are relevant to final consumers rather than absolute changes higher taxes (leading to higher retail prices) protect consumers from price jumps even if taxes are not reduced at this moment.
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