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US vs. Europe: Energy battle heats up

One of the biggest themes at Davos this year — and one that was not there last year — was "competitiveness." You encountered it whether in the public sessions in the Congress Center, or in the private sessions, and at the various dinners in the hotels strung along the Davos Platz.

This particular rivalry pits the United States head-on against Europe. And, no question — at Davos this year, the United States was judged the clear winner, much to the dispirit of the Europeans trudging back along the icy, snowy streets of this mountain village.

This concern, however, was hardly limited to the annual conclave in the Swiss Alps. It reverberated with simultaneous developments in both Brussels and Berlin that point to the beginning of a major, if difficult, rethink of Europe's energy policies.

A rig hand removes drill pipe from a natural gas well at a hydraulic fracturing site located atop the Marcellus shale rock formation in Washington Township, Pennsylvania.
Ty Wright | Bloomberg | Getty Images
A rig hand removes drill pipe from a natural gas well at a hydraulic fracturing site located atop the Marcellus shale rock formation in Washington Township, Pennsylvania.

Of course, competitiveness among nations gets measured in many different ways. Sometimes, it is in terms of rule of law and sanctity of contracts, regulatory predictability, risks of litigation and class-actions suits — or even the length of time it takes to start a new business.

But this year at Davos, it was calibrated along only one axis — energy. And that measure is creating great angst for European industry. It is also emerging as a challenging issue for policy makers, who, until now, have been quite assured that Europe was on the right course when it came to energy policy.

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It all comes down to shale gas and the energy revolution it has triggered in the United States. As a result of the rapid advance of shale technology, the United States now has an abundance of low-cost natural gas — at one-third the price of European gas. European industrial electricity prices are twice as high as those in some countries and are much higher than those in the United States. To a significant degree, this is the result of a pell-mell push toward high-cost renewable electricity (wind and solar), which is imposing heavy costs on consumers and generating large fiscal burdens for governments. In Germany, it was further accentuated by the premature shutdown of its existing nuclear industry after the 2011 Fukushima nuclear accident in Japan.

All this puts European industrial production at a heavy cost disadvantage against the United States. The result is a migration of industrial investment from Europe to the United States — what one CEO called an "exodus." It involves, not only energy-intensive industries like chemicals and metals, but also companies in the supply chains that support such industries.

A year ago at Davos, this question was hardly evident. I can recall only one discussion on the topic last year, and it was over a cup of coffee in the cramped lounge halfway up the main staircase. But this year, the issue was at the top of the agenda. In one session I attended, a senior European official declared that Europe needs to wake up to the "strategic reality" that shale gas in the United States is a "total game changer." Without a change in policies at both the European and national levels, he warned, Europe "will lose our energy intensive industries — and we will lose our economy long term."

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Yet the competitiveness gap will continue to expand as Europe remains locked in a path of still-higher costs — unless there is a change in policy. And the first signs of a potential change of policy abruptly emerged in both Brussels and Berlin during Davos week. European policy makers, struggling with already high unemployment, have begun to visualize the further job loss that will result from shutting down European plants. They have also started to pay attention to the 2.1 million jobs in in the United States supported by the unconventional oil and gas revolution.

In Brussels, coinciding with the first day of Davos, the European Commission released a new policy paper on energy and climate. It reiterated the commitment to substantial growth in renewable electricity and a "low-carbon economy." But, for the first time, it put heavy emphasis on the price of such policies and called for a "more cost-efficient approach" to renewables. It warned of the mortal risk facing "industries that have high share of energy costs and which are exposed to international competition." It declared that policies have to promote "competitive" as well as "sustainable energy" — a juxtaposition that was not heard before. It even warned that "the rapid development of renewable energy sources now poses new challenges for the energy system."

Notably, the new policy statement went out of its way to observe that "the availability of shale gas in the USA has substantially lowered natural gas prices there as well as electricity generated from natural gas." Despite the fervent opposition to shale gas in some quarters in Europe, it pointedly included shale gas as among the domestic low-carbon energy sources that member countries can pursue.

This was all the more significant in that the commission is acknowledging the reality of the shale revolution and rejecting the view of Europe's anti-shale activists that America's shale gas abundance is only a "bubble," destined to soon disappear.

A similar message resounded at exactly the same time from Berlin. Sigmar Gabriel, the social democratic minister of economy and energy in Germany's coalition government, called for reform in Germany's Energiewende — or "energy turn" policy — which has heavily subsidized the rapid growth in renewable electricity. He warned that the "anarchy" in renewable energy and its costs in Germany had to be reined in: "The whole economic future of our country is riding on this," he said. "We have reached the limits of what we can ask of our economy."

Up until now, the Energiewende in its present form has been sacrosanct, supported not just by the Greens but all across the political spectrum. Gabriel — and Chancellor Angela Merkel — aim to maintain the commitment, but reduce subsidies, focus more on costs, and, as Gabriel said, "control the expansion of renewable energy."

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His comments reflect the recognition that, if the course remains unchanged, Germany could be facing what Gabriel called "a dramatic deindustrialization." And that would threaten Germany's prosperity, which hinges to a considerable degree on Germany's international competitiveness. Exports are responsible for over 50 percent of German GDP, compared to 27 percent for China, which is generally considered to be the workshop of the world.

Gabriel's comments stirred up criticism from environmentalists; indeed, they may seem strange words coming from the leader of the Social Democrats (the SPD). But the Social Democrats are very close to the trade unions, for which loss of competitiveness translates into loss of jobs.

And it is jobs, as much the specter of "deindustrialization," the disinvestment in industry, that is now making competitiveness a significant part of Europe's energy debates, especially on a continent where unemployment is so high. The risk of major job loss could well provide the political stimulus to moderate energy policies in order to narrow the trans-Atlantic gap that was so evident a theme this year at Davos.

— By Daniel Yergin

Daniel Yergin is vice chairman of IHS and a Pulitzer Prize-winning author. His latest book is "The Quest: Energy, Security, and the Remaking of the Modern World," which includes a section on the development of Europe's renewable policy and Germany's Energiewende. Follow him on Twitter @danielyergin.

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