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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.

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