The sharp drop in oil prices in the second half of last year is causing some dilemmas not only for individual chemical producers in Europe, particularly those making petrochemicals and other energy-intensive chemicals, but also the region's industry as a whole.

After a decline in the price of Brent crude of over 60% from mid-2014 to a low of $48 per barrel in January, chemicals companies have to decide whether to rethink their strategies on the basis of oil prices staying well below the high levels of $100 a barrel or more which have prevailed in recent years.

In addition the industry, led by the European Chemical Industry Council (CEFIC), may be under pressure to adjust its policy on persuading the European Union and its 28 member states to take measures to bring down Europe's high energy costs.

A lot depends on what will happen to oil prices in the short and medium term-whether it will bounce back to its previous high levels or dive below $40 per barrel to as low as $20, which is seen as a possibility by a minority of analysts.

Uncertainties about Future Oil-Price Levels

The consensus at the moment is that in 2015 prices will average $60-70 per barrel, a prediction backed by BASF, the world's and Europe's largest chemicals company which is also an oil and gas producer itself.

"This expectation is based on what we see in the market, what we hear from the experts and our efforts to understand what is going on," Kurt Bock, BASF's chairman told the company's annual press conference at Ludwigshafen, Germany, at the end of February. "It's difficult to make any firm forecasts on the oil price beyond this year," he added later.

Some of Europe's larger chemical sites are reporting that companies are holding back investment decisions partly because of doubts about future oil price trends.

"They are including uncertainties about oil prices into their risk profiles of investments," says Stan Higgins, chief executive of the North East of England Process Industry Cluster (NEPIC), which based in Teesside and most of whose members are chemical companies. "What concerns them are doubts about what the oil prices will be in the long term," he adds.

By the end of February the price of Brent crude seem to be stabilizing at around $60 a barrel after a rise of over 15% through the month, the biggest monthly increase for almost six years.

However by early March analysts were warning that the crude price could soon start slipping again after data on inventories showed that storage facilities were almost full to the brim. In the US total inventories were slightly over 425 million barrels, their highest for over 80 years and around a fifth higher than the five-year average.

The large amounts of oil in storage are seen as confirmation that despite much fewer drilling rigs being in operation, particularly in the US, oil production is not yet flattening out, let alone declining.

No Significant Cutbacks in Oil Output

"The lower count for operating rigs is misleading because it is the old and inefficient ones which are being closed down," explains Paul Hodges, chairman of the London-based chemicals consultancy International eChem (IeC).

"There have been no significant cutbacks in output and it is unlikely to go down much in future either," he says. "Oil companies will want to continue producing because they need the cash flow. Oil-rich countries like Venezuela have no choice but to keep up production because it's the main source of government revenues. Even Saudi Arabia will not want to keep its oil reserves lying in the ground."

An underlying downward trend in oil prices could bring them down to the $20s range per barrel, according to Mr Hodges. Like other analysts, he believes the high oil prices above $100 were mainly a result of speculative funds pouring into the oil market after financial stimulus measures like the US government's quantitative easing.

The International Energy Agency (IEA), the Paris-based intergovernmental think-tank and energy policy advisor, warns that, at a time of overall weakening demand, oil faces increased competition from other energy sources -natural gas, coal and above all renewables. Wind and solar power and other renewables will account for nearly half of the global rise in power generation through to 2040, according to the agency.

"The dynamics of global demand and the place of oil in the fuel mix are undergoing dramatic change," the agency says in its latest medium-term oil market report (MTOMR), published in February and covering the five years 2015-2020. "Emerging economies -China chief among them-have entered a new, less oil-intensive stage of development."

The global economy, now IT dependent, has become less fuel intensive with climate change concerns also reshaping government and corporate energy policies in favor of greater energy efficiency.

"And the globalization of the natural gas market, coupled with steep reductions in cost and availability, are causing oil to face a level of inter-fuel competition that would have seemed unfathomable a few years ago," the agency explains.

Once oil prices do settle, the agency reckons that they will be at "levels higher than recent lows but substantially below the highs of the last three years."

On the basis of recent average prices in the oil futures markets, the agency is assuming that prices will rise to the upper $60s per barrel in 2016-17 and then to the lower $70s by 2020.

Meanwhile the agency expects that the oil price declines from the previous highs will only have a "marginal impact" on growth in global economic demand. Projections of demand growth for oil itself are being revised downwards rather than upwards since the drop in prices.

CEFIC's Tougher Task Lobbying over Energy Costs

The European chemical industry is also not anticipating that the fall in oil prices will do much to boost demand for its products. CEFIC is still sticking to predictions made earlier last year -before the plunge in oil prices in mid-2014--of a 1.5% increase in chemicals output in Europe in 2015.

This is mainly because the oil-price decrease has not been big enough to offset the undermining of the industry's global competiveness by Europe's high energy costs.

"In its dialogue with governments and the EU, the industry must continue to highlight the huge disadvantages regarding our energy costs in comparison with other areas in the world," said Mr Bock, CEFIC's immediate past president.

Hans-Ulrich Engel, BASF's chief financial officer, pointed out that although the oil prices cut had slightly narrowed the gap between the North American and European energy costs, natural gas prices in the first quarter of this year were still around 2.5 times higher in Europe than in the US-- $7-7.5 per million British thermal units (MMBtu) against $2.88 per MMBtu.

The European industry is emphasizing that oil prices are only one among a number of factors which is contributing the high energy costs. One of the most important of these is higher electricity prices due to the subsidizing of renewables.

Oil-price levels have a big impact primarily on Western Europe's petrochemicals sector where 85% of ethylene is derived from naphtha, gas oil, and other light distillate oil-based products.

"European governments would be making a big mistake if they think that high energy costs are no longer a big issue for the industry because of the decline in oil prices," says Nick Sturgeon, energy, trade and competiveness director at the UK Chemical Industries Association (CIA).

The main objective of the European Commission over the last few years has been to put forward measures which will reduce EU energy consumption while at the same time improving the security of energy supplies in Europe.

"There are concerns about the Commission's philosophy still being based on the belief that energy is too cheap in Europe and needs to be made more expensive by pushing less competitive energy sources like renewables," says Peter Botschek, CEFIC's energy director.

Effects of the EU ETS Market Stability Reserve

Now the industry is also worried that the EU will try to compensate for low oil prices unfairly by bringing forward the introduction of a proposed scheme for raising the price of carbon allowances within the EU's Emission Trading System (ETS). The carbon price, which is supposed to benefit the development and operation of low carbon technologies, is languishing at around €7 per ton because of an excess of around 2 billion allowances on the market.

The European Parliament's powerful environment committee voted in late February to introduce the ETS Market Stability Reserve (MSR), a mechanism for reducing surplus carbon credits, at the end of 2018 instead of 2021 as proposed by the Commission. Analysts believe the MSR could almost triple the carbon price to €20 per ton by 2020.

"The MSR would effectively be a mechanism for controlling the carbon price because it would be used both to take allowances off the market and bring them back in at times of excess or lack of supplies of credits," explains Mr Botschek. "It could now be introduced as early as 2017, which is a move supported by the governments of UK, Germany and France. Our own studies have shown that a €20 carbon price would be very damaging for our industry."

The EU decision on when to start operating the MSR is likely to be influenced considerably by the future trends in oil prices.