Energy in Europe is also at stake as Israel-Iran tension escalates

Yahoo

22-06-2025

Rising European energy prices are among the many risks of the current geopolitical crisis, which threatens to block one of the world's most important fuel shipping routes. Coupled with the trade war sparked by US tariffs, there are fears that the crisis may also drag down the global economy.
The World Bank is expecting 2.3% growth for this year, after a 2.8% reading in 2024.
Since Israel launched airstrikes against Iran's military and nuclear infrastructure on 13 June, oil prices have surged by more than 10% globally. High prices and supply disruptions, coupled with the implications of the trade war, are threatening to lower production globally.
Markets are pricing in risks to the global oil and liquefied natural gas (LNG) supply.
Iran is controlling the highly strategic Strait of Hormuz, through which one-third of global seaborne oil and one-fifth of global LNG shipments travel. If that gets blocked, prices could skyrocket beyond $100. Currently, a barrel of crude oil is traded for more than $75, and international Brent is around $77.
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'I do not expect that the strait is going to be closed,' Dr. Yousef Alshammari, President of the London College of Energy Economics, said to Euronews Business. He added: 'It is simply because Iran needs the Strait of Hormuz open for ships to go through for its clients, India and China.'
However, even when it is not closed, the passage has already impacted prices due to the risks associated with the crisis. Some oil tankers have refused to go through. According to the FT, the world's largest publicly listed oil tanker company Frontline said it would turn down new contracts to sail through the Strait of Hormuz.
Meanwhile, 'insurance companies are likely to charge more currently, while Qatar is trying to delay its LNG shipments going through the Strait,' added Alshammari.
Natural gas fields in the region are also attracting attention. Iran shares the largest natural gas field in the world, the South Pars field, with Qatar. The liquefied natural gas (LNG) coming from this region is vital for the rest of the world, including Europe.
Though the EU has adequate supplies of LNG at the moment, the bloc's dependence on global LNG makes it vulnerable to geopolitical shocks as it is lowering its dependence on Russian gas.
As the market weighed the recent risk of supply disruptions, European gas prices climbed significantly. The primary benchmark for European gas prices, the Dutch TTF (Title Transfer Facility) rose to a three-month high, nearing €41/MWh Friday at midday in Europe.
Europe's imports from Qatar are providing nearly 10% of its LNG needs. Other countries in the region, including Egypt, also export LNG to Europe. However, after the 7 October 2023 Hamas attack, Israel closed down part of its own production, forcing Egypt to stop LNG shipments and prompting a spike in European natural-gas prices.
Europe currently has a number of natural gas suppliers. Norway was the top supplier of gas to the EU in 2024, providing over 33% of all gas imports. Other suppliers included the United States, Algeria, Qatar, the UK, Azerbaijan and Russia.
The largest LNG importing countries in the EU include France, Spain, Italy, the Netherlands and Belgium.
If shipments from Qatar are impacted, Belgium, Italy and Poland are the most impacted, as the country supplies 38-45% of their LNG imports, according to the Institute for Energy Economics and Financial Analysis (IEEFA).
The good news is that demand for gas is usually at its lowest level in Europe at this time of the year. Even so, the hotter-than-usual weather across the bloc is boosting demand for cooling, which could increase the need for energy in the coming weeks.
'Spikes in energy prices push up inflation, and can have a knock-on effect on the central bank's policy,' Alshammari said.
Central banks, including the US Fed and the Bank of England, have stopped short on cutting interest rates as the uncertainty is rising. If they see that inflation is more persistent in the near term, and that — in the case of the ECB and the BoE — the 2% target is floating away, further monetary tightening could squeeze the economy with higher costs for borrowing and investment.
"As a result of the Ukraine War, there was a pivot from the EU in particular to get their liquefied natural gas, their LNG gas, not from Russia but from producers including Qatar,' Marco Forgione, Director General of the Chartered Institute of Export and International Trade, told Euronews. He added that anything constraining the transit of liquefied natural gas will have a quick impact on the EU, 'particularly in the manufacturing sector'.
Oil demand is the highest in summer, partially due to industrial activity. But current supply constraints and higher prices could further squeeze manufacturing.
For European businesses, who are already facing heightened trade tensions linked to US tariffs, facing the current complications is "like playing four-dimensional chess', Forgione said.
He predicted that sudden spikes in oil prices and depressed shipping rates may result in significant consumer price increases, supply shortages, and shrinkflation. This is where a product shrinks in size but the price remains the same.
Iran's energy infrastructure is in the crosshairs of the conflict.
The country is the ninth-largest oil producer globally. At full capacity, the country produces 3.8 million barrels of oil a day, according to the US Energy Information Administration. But due to Western sanctions, Iran's oil exports are mainly shipped to China and India.
Iran exports 1.5 million barrels per day, providing 10% of China's oil imports. If the world's second-largest economy, China, is deprived of this import, it could impact its economy as it is forced to source this from elsewhere, meaning prices could skyrocket.
The potential geopolitical consequences of the Iran-Israel conflict are leaving markets on edge, and it seems volatility is here to stay.
Meanwhile, Europe's role in the conflict remains to be seen.
'My biggest worry is that it turns out to be a wider conflict, involving European countries, UK and France. This is the scenario that nobody wants to see happen,' added Alshammari.