The authors, both directors of the Focus Abengoa-Fedea Research Program on Energy and Climate Change, analyze the energy-saving measures taken by the government in the context of the capacity of the Spanish economy to reduce its energy dependence.
The measures taken by the government since Friday the 25th of February to reduce fuel consumption initially, and subsequently for energy saving in general opened an intense debate about the capacity of the Spanish economy to modify its mix of energy generation and use and reduce its energy dependence, especially on imported fuels. Undoubtedly, the debate is very welcome, particularly for the transport sector where nothing or very little has been done in favor of energy efficiency for too many years without oil shocks. Now, after the first big setback in the threshold of the Great Recession in the summer of 2008, which has proved transitional precisely because it was connected to the triggers of the crisis, it seems that energy rush becomes necessary in the view of the serious yet hopeful events of recent weeks across the Mediterranean.
The inflation imported by the rising price of oil and gas, and the damage that this rise may cause to the balance of trade may significantly worsen the economic statistics by the end of the year. Right now we can seethe direct impact on fuel prices since December, but probably in May-June we can fully see it on the price of gas from which 30% of electricity in Spain is generated and whose supply contracts are mostly indexed to oil prices with a lag of six months. During this period of time we will see a greater or lesser indirect effect on the price of various products, going from a non-inflationary environment if we exclude raw materials and foodstuffs. The magnitude of the indirect effect, and perhaps the direct effect, may depend in part on the effectiveness of certain energy saving measures like those announced, in the very short term.
It would be interesting to know the oil price forecast and time frame from the government, while efforts are made to evaluate the effectiveness of the energy saving measures to be implemented. For example, the controversy on the fuel-saving capacity of the measure that limits the maximum speedon motorways has been unusual. A 15% saving on petrol and 11% on diesel was announced. However, several analysts have evaluated the savings well below 5%, probably also with a limited accuracy because we have no rigorous studies that have previously assessed the impact of such measure. It is neither a measure that is on the list of priority recommendations of Spanish agencies like the IDEA (Institute for Diversification and Energy Saving), or the International Energy Agency, as these organisms often considermedium-term measures. In addition, limiting speed on highways has proven to be a measure that seems to affect all types of sensitivities, thissaid without underestimating their capacity to collect taxes through the new category of fines, or more positively, the opportunity to continue saving lives on the road .
What is also important, as Jesus Fernandez-Villaverde demonstrated in the FEDEA blog “Nada es Gratis” (Nothing is Free) the very evening of the announcement, is that we economists have no reason to justify that measures such as the one proposed for managing the shortage, in this case of energy, regardless of the price mechanism, are the best way to save fuel.
An objection to the convincing nature of the above arguments: i) limited effectiveness for savings and ii) economic theory suggests that it is not the best measure and it may have more to do with the immediate concerns of the government. If, as we said, what worries the government more is the deteriorating trade balanceand, more uncertainly, the upward trend of the inflation and how in a context like the current recession to transfer to the expectations of the agents the introduction of a temporary charge on the fuel tax could have been discarded as an alternative reference measure at the cabinet meeting. More so, when they are still absorbing the tax and energy price increases of recent months.
Therefore, knowing the scenario of the high oil prices that the government is working with would help assess the impact on the upward trend of inflation (on the consumption basket) in the coming months, at a time when income policies are at the heart of theeconomic policy agenda. Wage restraint and its renewed links to productivity, the reforms to make the pension system sustainable, or the moderation of the cost of credit in view of the fragility of indebted mortgage holders, will not find exactly their best ally in new oil shock. Certainly the inflation rate in three months has gone from 2.3% to 3.6%, but it still stands in the range of forecasts made late last year because what still dominates the evolution of the RPI is mainly the base effect.
To the important effect the rising prices of fuel, electricity and gas are having on the RPIwe must addthe increase of the importance of these components inthe construction of the RPI for all 2011. If we consider the products by classes, among 79 categories, the largest weighting goes to the hotel industry (107.76 per thousand). The third largest to fuels and lubricants (59.69) and the eighth largest to electricity (28.68). At some further distance between the energy categories are the gas and other fuels. If we add the weights of these four energy-related categories, we get a weight of 106.27, almost the same as hotels, restaurants, bars and cafeterias. Moreover, if we compare the weights of 2011 to those of 2010, there have been major changes (in percentage points) in the category of Fuels (+1.79) and Electricity (+1.78), variations which, as we said, are largely related to energy taxes and duties rates adopted by the government not long ago. Given our extraordinary dependence on oil for transportation, the energy crisis affects us more than the rest, at least our RPI.
The fact that this affects us more than the rest of the EU through the RPI merely reflects the characteristics of the Spanish economy that make it more vulnerable to energy shocks than neighboring countries. Approximately 47% of all the primary energy consumed in Spain is oil and derivatives, and 25% is a gas. These percentages are somewhat lower in Europe, around 40% in oil and also the 25% in gas. Thus, with regard to these two energy sources, the Spanish primary energy mix does not differ much from the European. The problem in Spain is that we do not produce any of this energy. In fact, almost 80% of the total primary energy consumed in Spanish is imported, and if we focus on oil and gas, the imported percentage is nearly 100%. This 80% is almost twice that of the EU-15 and almost three times the OECD average. To all this we must add the fact that Spain is among the few countries in Europe, which is growing slowly without increasing energy consumption. If we exclude the period of the crisis and thus the housing slowdown, Spain is almost the only European country that has failed to reduce its energy intensity (energy consumption to GDP ratio). For their part, in most European countries energy intensity has decreased (for example, in Germany it has fallen by almost 2% per year), that is, they have managed to grow without consuming much energy. It takes time to change this trend, since it depends not only on how efficient the country in energy consumption is, but also on the structure of the country. This also makes Spain more vulnerable to energy shocks.
In the midst of this enormous energy dependence, the transport sector is the largest final energy consumer. It uses about 40% of the total (one of the largest in the OECD) and it is almost ten percentage points higher than that of the transport sector in Europe. Moreover, almost 80% of this 40% goes to road transport and an important percentage also goes to freight. Since almost 95% of its energy consumed by transportation comes from oil and its derivatives, this strategic sector for any economy becomes, besides being one of the most polluting, of the most vulnerable to energy shocks such as those we are currently experiencing. We should not be surprised that the star fuel-saving measure is intended to directly affect the total number of cars circulating on highways and motorways at the highest speed, at a time when we are trying to get out of a crisis as sever as the one we are suffering from since 2008.
On the other hand, the external sector is the one that pulls the economy, and the deteriorating balance of trade through our fuel oil dependency does not help recovery. Among the signs of recovery the Spanish economy needs to send to the markets every tenth of real GDP growth is crucial, and even more if it comes from foreign balance of trade. In addition, the escalating inflation and the increasing differential withthe neighboring countries would finally put pressure on the risk premium of our debt which would not help to restore the balance of public finances that is so necessary for recovery.
The events occurring in the south of the Mediterranean have made the urgency to reduce our dependence on foreign energy extreme. The first line of action is to change the energy mix and the second entails improving energy efficiency. There is consensus on the direction to follow, but the difficulty lies in the details of the road ahead. The mix change takes time and must be seen as a medium to long term plan, although it is essential to move forward steadily.Efficiency improvements may be more immediate, but in the very short term there is no magical (either for not being deliverable or for being unpopular) that is magical. The measures proposed last week by the government are in this line. Some may be more effective or quicker and easier to implement than others, but all are intended to curb energy demand, and although each measure taken individually will have little impact, many small measures could help achieve the macroeconomic goals mentioned.
The measures to reduce fuel consumption and thus inflationary pressures and the pressure on the balance of trade by the demand side can be very different. After the failure of the process of dieselization which, according to recent studies has had a rebound effect on mobility and fuel consumption superior to the one from its higher energy efficiency, we must look at other more direct measures. Any measure that reduces mobility is unpopular and takes time, and more so in an election period. The measures to push alternative means of transport require infrastructures and public spending (which is not currently available). Something similar occurs with the use of biofuels and electric vehicle development (slower), although it would be urgent to assess how much they can rescue us as we discussed in a recent report for the IDEAS Foundation. The idea is neither to penalize the car industry, nor to increase taxes that raise the inflation points. In short, perhaps the measure to reduce the maximum speed on motorways, as we have just said, is not as paradoxical as many analysts in the broadcast media have painted it to be in recent days. We will have to see if it is efficient not so much for energy saving but for the containment of inflationary pressures and the negative trade balance.