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On a proposal from Mr Nicolas Mosar, the Member of the Commission responsible for energy policy, the Commission has adopted a new communication on the situation in the oil- refining industry. It will be discussed by the ten energy ministers in Brussels on 15 March. In addition to the customary analysis of the progress made in restructuring the industry - which has been satisfactory - this time particular emphasis is also placed on how the newly-built refining capacity in some of the oil-producing countries in the Middle East (Kuwait and Saudi Arabia) and North Africa (Libya) is likely to affect the Community market. The section on refining demonstrates that the policy advocated by the Commission, and regularly endorsed by the Council since 1978, of setting a 1990 capacity target for the Community as a whole and then leaving it to the individual companies to bring their Community-wide capacity into line with the forecast demand for their products is still proving effective. It should be possible to achieve the Commission's capacity target - an estimated 550 million tonnes by 1990 - on schedule. On imports, the Commission feels that the world and Community markets should be able smoothly to absorb the extra petroleum products which will soon be flowing out of the new export refineries at an estimated 50 million tonnes a year. However, this will depend partly on the position taken by the new exporting countries and partly on the other leading consumers - the USA and Japan. Consequently, providded the forthcoming talks with those countries confirm that the extra exports will be spread evenly between the different markets, there should be no need to contemplate tariff measures against the exporters benefiting from the Generalized System off Preferences (GSP). Nevertheless, the option of reimposing duties should circumstances warrant must be retained. (1) COM(85) 32 - 2 - The changing outlook for refining in the Community raises a series of industrial restructuring problems which have to be solved in a way which allows the industry to adapt to the new circumstances on the market but also takes account of the social consequences of closing excess capacity. Some of the problems stem from changes in the pattern of foreign trade in refined products. Consequently, whatever solution is adopted will have to reflect the Community's traditionally liberal attitude to trade policy and the options open to the Community to cooperate with the developing countries. Nur must it overlook the stretegic implications for the Community's security of supply. Finally, if they are to be fully satisfactory the adjustmeents must also comply with the rules laid down in the Treaty, and in particular those on free movement and free competition within the Community. Only petroleum products are discussed in the communication. Similar problems arise with petrochemicals, but the Commission intends to examine them later, in the appropriate context. The Community has no intention of modifying its support for free trade just because of the surge in petroleum product exports from the new refineries no on stream in a number of oil-exporting countries in North Africa and the Middle East. Instead, the Commission has proposed that the Council should adopt the following conclusions and guidelines: REFINING Since 1978 the Commission has been advocating, and the Council has regularly endorsed, a policy of setting a target ffor the Community as a whole and then leaving it to the individual companies to bring their Community-wide capacity into line with the forecast demand for their products. This approach has consistently proved effective and should therefore be continued. Primary capacity has been reduced by 33% since 1977 peak and is now about 10% in excess of requirements assuming a capacity utilization rate of 80%. Provided the plant now mothballed is dismantled, or made inoperable, by 1990 primary distillation capacity will have been brought down to a level close to the Commission's June 1983 estimate of the maximum capacity needed in 1990, i.e. 550 million tonnes a year (1). The Commission feels that this estimate is still valid, based on its latest assessment of demand for oil and of the increase in net imports of finished products to be expected, assuming that there is no disproportionate increase in the Community's share of imports from third countries. However, there is still considerable uncertainty about the volume of products likely to be processed in refineries in future, and developments will have to be carefully monitored. (1) COM(83) 304 final, 3 June 1983 - 3 - The conversion plant now in place or under construction should be enough to meet all the demand expected in 1990. However, heavy investment will have to be made in upgrading producct quality and in fitting desulphurization plant to meet new environmental standards. The Commission will have to monitor the progress made on these points. Although some of the closures have severely hit a number of regions with high unemployment, on the whole the restructuring in this sector has not been drastic enough to impose social costs out of all proportion to the economic benefits achieved or to justify special measures by the Community. IMPORTS OF REFINED PRODUCTS On assumptions which seems reasonable today, the world market should be able smoothly to absorb the extra volume of petroleum products produced by the new export refineries scheduled to come on stream in Saudi Arabia, Kuwait and Libya between now and 1990. However, this can be achieved only if every country involved maintains its traditional responsible attitude to trade in petroleum products. Another key factor is the policy adopted by the leading consumers - i.e. by the Community, the USA and Japan. As a working hypothesis, it is fair to assume that the new refineries coming on stream in the Middle East and North Africa between 1984 and 1990 will put an extra 1 million barrels a day or 50 million tonnes a year on the world market. The Community imposes no quantitative restricctions (quotas) on imports of petroleum products. It also totally exempts all products imported for further processing or as feedstocks for the manufacture of petrochemicals from all customs duties. Consequently, only oil products for the consumer market are liable to duties. Even these "prevailing" duties are lower than those consolidated in the GATT since they have been set at 6% for light and medium oils and 3.5% for heavy oils (gas oils and fuel oils). The Community hasconcluded agreements exempting imports of oil products from the EFTA, ACP and Mediterranean countries from all duties. Only imports from a few industrialized countries (notably the USSR and the USA) are subject to duties. In addition, the Community extends the preferential arrangements allowed by the Generalized System of Preferences (GSP) to oil products as well. Although Saudi Arabia, Kuwait and Libya - the countries where the new refineries are sited - have no association agreement with the Community, they are covered by the GSP and therefore qualify for the advantages which it confers. Thanks to this unilateral concession by the Community, most oil imports from those countries are admitted free of duty, subject to a ceiling, which is fixed on an annual basis for each of the three principal product categories and separately for each of the exporting countries. As soon as exports from one of the countries hit the ceiling, duties can be reimposed at the request of a Member State or on the Commission's own initiative. In practice, although the ceilings have been exceeded by large amounts several times since 1979, no use has been made of the facility. - 4 - The USA levies lower customs duties on oil productss than the "prevailing" duties applied by the Community. Oil products are, however, excluded from the American GSP which, in any case, does not apply to the Gulf countries. Although the USA has so far maintained an open attitude towards imports of petroleum products, calls for protectionist measures have been voiced in Congress and by some circles in the industry recently. In practice, the potential for importing products into Japan is limited to fuel oil, on which the Japonese Governmen has placed quotas, and naphtha. On the whole, Japanese customs duties are about the same as the CCT duties except in the case of fuel oil, on which the duty is progressive depending on the total volume imported. Ne generalized preference is granted to petroleum products from the Gulf countries, though the Gulf countries do enjoy GSP status in respect of other exports to Japan. Since mid-1984, Japan has begun to make moves to draw supplies of refined products from other countries, though this trend has had littlee effect so far. One last point is that in future feedstocks could account for a high proportion of the products exported by refineries in the oil-producingg countries - indeed they are already beginning to today. Far from encroaching on the Community refineries' market, these feedstocks could supply them with a cheap raw material in place of crude. The fact that fuel oil accounts for such a large share - roughly one third - of the output from the new exporting refineries suggests that this could well be the case, but whether it proves to be so will depend in part on crude-to-product price ratios and on the conversion plant utilization rate. Given all these uncertaintiess, it is difficult to forecast what proportion of the extra 50 million tonnes will be placed on the Community market. Assuming that the extra exports are allowed free access to all the main markets in the world, about 20 million tonnes a year (i.e. nearly 40% of the total) (1) should reach the Community market by 1990". Of this total, some 15 million tonnes would be finished products ready for consumption and the rest feedstocks. By 1990, such an increase would take net imports of finishedd products up to the 30 million tonnes mark, i.e. to about 7% of estimated consumption. This would be in line with the growth in world trade in oil products and would also help to diversify the Community's supply and make it more flexible. It cannot be ruled out, however, that the market in some regions of the Community will be more afected than in others. The only constructive response to this problem is to practise healthy competition to speed up the integration of the Community's internal market. (1) This would bring net imports of these products (including feedstocks) up to about 53 million tonnes. - 5 - Options open to the Community The Community has alays pursued a liberal policy on oil imports. It seems neitheer necessary nor expedient to change track at a time wheen the countries where most of the new refineries are sited have expressed their desire to establish stable, mutually advantageous relations with the Community in the form of a cooperation agreement. This openness must not, however, result in the Community bearing the whole burden of the new refineries' entry into the market. Efforts must be made, therefore, to ensure that all the potential markets for these exports - and in particular the USA and Japan - are prepared to adopt a similar attitude so that the products are phased in evenly. Avoiding escalating protectionism is the only way of preventing distortions which would work to the detriment of all concerned. Finally, if the new refineries are allowed access to all the major consumer markets they will be able to exert a balancing influence thus enhancing market stability and the smooth operation of international trade in oil products. In order to ensure that this openess continues, it is equally important to forecast import trends and to know exporters' intentions. The CCommunity should therefore consult the countries in question and keep everyone informedd of the outlook for oil supply and demand. The Community will then be able to evaluate the consequences of its present policy which offers new exporters the chance of the stablest possible outlet on its market without jeopardizing the survival of a reasonable level of refining capacity in the Community, consistent with its legitimate security of supply needs. Application of custums duties under the Generalized System of Preferences (GSP) Providedd the talks with the Community's industrialized partners and the exporting countries covered by the General System of Preferences (GSP) confirm that the extra imports from the new refineries will be marketed in an orderly manner and without any risk of disturbing the Community market, there will be no need to contemplate tariff measures. Nonetheless the option of reimposing duties on products from these countries should circumstances warrant must be retained. Moreover, as the Member States' oil experts acknowledged in January 1983, it is essential for the Commission and the Member States' experts continuously to analyse shifts in the pattern of imports. Future GSP arrangements In the course of the year the Commission will have to put forward proposals laying down the framework within which the GSP will operate from 1986 to 1990. The porposals on oil products will have to reconcile two demands: - 6 - (i) the refining industry in the Community must be certain that it can press on with the rationalization process that it has started; and (ii) the benefits of providing a stable outlet for the newly-constructed refineries in certain oil-producing developing countries must be recognized, especially when supplies from these refineries work to the long-term economic advantage of the consumer. Consultation in the Community At least once a year, or whenever special circumstances dictate, the Commission and the Member States will consult each other about the trend of refined product imports from third countries.