Ghosts of the 2022 energy crisis

‘Spillover’: Iran energy shockwaves hit Europe  

Leaders still haunted by the ghosts of the 2022 energy crisis are bracing for another economic shock.

By Charlie Cooper, Giorgio Leali, Ben Munster, Victor Goury-Laffont and Giovanna Faggionato

It’s all starting to feel very 2022. 

That year lives in infamy for Europe’s leaders, who remember its security implications after Russia’s full-scale invasion of Ukraine but also — just as painfully — the energy supply and price shock that followed.  

Prices spiked, supply fears stalked the continent, and governments were forced to spend hundreds of billions of euros on bailouts for households and industry. 

Now, with oil and gas prices surging once again — because of another war beyond Europe’s control — leaders are scrambling to find a response.

The price of a barrel of oil broke the $100 mark on Monday as the war in the Middle East — sparked by U.S. and Israeli strikes on Iran — entered its second week, with no clear end in sight.  

G7 finance ministers held an urgent meeting later in the day and said they “stand ready” to “take necessary measures,” including a drawdown on emergency oil reserves. But they stopped well short of committing to act. French Finance Minister Roland Lescure, who chaired the meeting, said G7 ministers had not yet agreed to make that move.

While the politicians talked, the Strait of Hormuz, a vital energy artery through which 20 percent of the world’s oil is transported, remains effectively closed by Tehran’s threats to shipping. Oil and gas production at sites in several Gulf countries has slowed down or ceased, with Iranian drones and missiles targeting energy infrastructure.    

And it’s hitting home. Across Europe, prices at the pump are already rising. The price of natural gas — the main driver of the 2022 crisis — is also surging, rising above €60 per megawatt hour on Monday. That isn’t yet near the dizzying heights of 2022, but higher than at any time since. 

“We are now seeing a regional conflict with unintended consequences,” warned European Commission President Ursula von der Leyen on Monday, in a speech to EU ambassadors, citing the effects on energy, trade and finance. “And the spillover is already a reality today.” 

Longer the war, deeper the pain  

European leaders have started to acknowledge that reality.

European Economy Commissioner Valdis Dombrovskis told reporters: “In a more benign scenario where the conflict is contained in a couple of weeks, one can expect that it would not have major effects on the global and European economy.” But a “more protracted” crisis, he said, “may end up with [a] substantial stagflationary shock on the global and European economy,” with higher energy prices then spreading to broader inflation.

Speaking at a military base in Cyprus, French President Emmanuel Macron said restoring shipping in the Strait of Hormuz would be “essential for the flow of gas and oil.” To achieve that, he said France wanted to establish military escorts for container ships and tankers “as soon as possible.” But such operations can’t get underway until the fighting in the Middle East subsides, he cautioned.  

G7 energy ministers will gather for an urgent meeting this afternoon in Paris, two European officials and one U.K. official confirmed.

The most important question for leaders is one that no one — except perhaps Donald Trump — can answer. How long will this war last?  

So far, steep oil and gas price rises have been tempered, energy analysts said, by a global oversupply of oil and an expected surge in global liquefied natural gas (LNG) production over the next few years.   

Increases in gas price also take time to bleed into consumer bills, giving policymakers some time to respond.   

European energy ministers are set to meet next week, with the rise in energy prices — and options for taming them — top of the agenda.   

One worry, an official from a national energy ministry told POLITICO, is that EU gas reserves have been depleted to unusually low levels after this year's cold winter. There is no guarantee traders can be nudged to refill them over the summer, they said — while insisting there is “no immediate concern.”

In theory, the EU can deploy stockpiles, arrange joint emergency purchases and impose price caps under emergency powers. But countries haven't yet called for these measures, preferring to wait and see how prices and supply are affected, according to an EU official.

But for oil in particular, there are already fears things will get worse before they get better — and the longer the war goes, the steeper prices will rise.  

“We are seeing large scale shut-ins in many middle Eastern countries including, shockingly, Saudi Arabia now,” said Ajay Parmar, oil specialist and director at energy market intelligence firm ICIS. “The consequences for the market will be far more significant than that seen in 2022.”  

‘Only fools’ 

Trump — despite fears in his own administration about the political fallout of a soaring oil price — is telling the world to suck it up.   

“Short term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for U.S.A. and World, Safety and Peace,” he said on Truth Social. “ONLY FOOLS WOULD THINK DIFFERENTLY.” Trump would claim later on Monday the war was “pretty much” complete — leading the price of oil to tumble back well below $100.

For European leaders fretting about the cost of living and voter backlash, eyeing the volatility of the markets, it won't be all that reassuring.

None of them, so far, have dared place the blame for the crisis at Trump’s door. The U.K.’s Energy Secretary Ed Miliband — despite being at odds with Trump on almost all matters of energy policy — was careful to tell MPs last week that upheaval on energy markets were a result of “Iranian threats to the Strait of Hormuz” — not the U.S and Israeli military action that preceded them.  

But one of his predecessors, Ed Davey, who was U.K. energy secretary until 2015 and is now leader of the centrist U.K. Liberal Democrat party, gave a hint of where the political debate about the war and its consequences may yet go in Europe.    

“This reckless and illegal war will result in people paying higher prices at the pump and their energy bills will go up,” he told the BBC on Monday. Davey added: “And people when they come to pay them will say: ‘Well, who caused this?’ It will be Donald Trump.”