EU’s directives on Energy and Environment put additional pressure on one of the most productive sectors of a weakened Greek economy.
By Ratish Srivastava (@socialia13)
Eight years since the Sub-Prime Mortgage crisis hit the world economy, Greece still seems to be on a downhill path. EU’s Directives on Energy and Environment are an encumbrance to one of its most productive sectors – refinery. Greece is losing its comparative advantage in the global economy, in turn hampering its ability to find a way out of trouble.
There are two major implications from this – one, the argument for the case of a Greece exit from the EU becomes stronger. Second, if Greece does have a choice to leave the EU then it will be choosing between long-term impact of its refinery sector on the environment or having more flexibility to improve the conditions of its citizens, at least through the refinery sector’s productivity.
The Greek economy has shrunk by a quarter in the past five years and unemployment is as high as 25%. Greece has received three bailouts from the IMF, the proceeds of which have been used to pay off their international debts. This crisis in the Greek economy and Europe’s debt crisis have combined to have a major impact on the refining sector in Greece.
A report by Foundation of Economic and Industrial Research in Greece, estimates that the refining sector has a strong impact on Greek economy. The research took into consideration the direct, indirect and induced effect of the sector on the overall economy. The report further estimated that the refining activity contributes € 3.8 billion and 40,000 jobs to the domestic economy, whereas its contribution to the tax and social security revenues is also significant. Another major contribution the refinery sector has is on reducing trade deficit, as the export of petroleum products amounted to 37.5% of all exports, most of which are going to non-EU countries who have the option to switch suppliers (86%).
In light of EU’s Directives on Energy and Environment, the refinery sector faces significant challenges as high financing and energy costs, lower margins, high cost of crude oil has reduced the competitiveness of Greek refineries in international markets. There is a dramatic shift in fundamental demand and supply trends of the world in refinery, as the refining capacity grew in Asia-Pacific (15%), West Asia (8%) and Russia (6%). The refineries in these economies have a high complexity index, implying that they can produce high value products in addition due to their size; they can achieve economies of scale.
The most complex refineries are able to produce petroleum products with high market value and process most types of crude oil, exploiting its price variations and availability. To achieve this complexity, significant investment needs to be made constantly. The refinery sector in Greece already invests in itself majorly, as the sector’s investment accounts for 26% of total investment in the manufacturing sector (€1.3 billion). This investment intensity comes as a surprise as Greece faces high rates on borrowing, making it expensive for them to borrow. However, this investment is seen as necessary to keep up with the international market for oil products in terms of increasing the complexity of the refinery.
The developing economies of Asia-Pacific, West Asia and Russia are export-oriented economies that are increasing the complexity of their refinery. With the domestic demand for oil products lesser than their capacity to produce them, with fewer compliance costs, lack of environmental regulations and low labour costs, these economies are able to price their goods competitively.
Greece will not be able to compete with these developing economies, due to additional costs imposed on them by the EU’s climate change policies. With the following directives in place – EU Emissions Trading System adopted in 2005 (EU ETS currently in its third phase 2013-2020), the Fuel Quality Directive in 2009 (FQD) and Industrial Emissions Directive (IED) in 2010, the refinery sector will not be able to compete in the international market and their products will face a competitive disadvantage compared to its rivals. These policies come at a time when the Greek economy needs more flexibility for the refinery sector to become competitive globally. However, the EU is hoping to achieve its ‘EU Energy Roadmap 2050’ which was launched in 2011 (which is, during the crisis period of Greece), as compliance with Best Available Technique (BAT) under IED is compulsory for an EU member state. BAT brings about high cost of emissions reduction for the refineries with little to no flexibility on meeting the emission targets. In a report by European Commission in 2014, the refining sector in EU has the highest energy cost worldwide with the cost for Greece the highest among EU member states.
The competitiveness of Greek refineries, which contributes significantly to the domestic economy, is not secured. Current legislations and policies of the EU create more problems and uncertainty for the refining sector in Greece as it is affected by a number of other exogenous factors (price fluctuation in crude oil prices, global economic crisis). The bailouts do not help Greek economy, as the money from them is not used to make necessary structural changes that the domestic economy requires. Yanis Varoufakis, the ex-Finance Minister of Greece resigned after his government accepted the third bailout package, maybe realising that the right steps towards a sound economic policy were not taken with the bailout.
One of the most productive sectors of the Greek economy faces uncertainty, reduced domestic demand, high costs, low margins and a comparative disadvantage in the international market. If Greece hopes to take the right steps to move towards a more stable economy, it needs its refinery sector to become more globally competitive. However, with strong pressure from the EU regarding its ‘Energy Roadmap 2050’, the chances for the Greece economy to improve its situation seem bleak as the potential of the refinery sector is being limited.
Ratish Srivastava (@socialia13) is a research intern at the Takshashila Institution
Featured image: Heiko Prigge/Monocle