‍What’s happening? The EU has moved to contain rising energy and food prices triggered by the US-Israel war with Iran, which has disrupted flows through the Strait of Hormuz. In response, governments have introduced price-control measures, including Germany limiting petrol price changes to once daily and Greece capping profit margins on fuel and groceries for three months. European gas prices have risen about 50%, while oil prices are roughly 25% higher since the conflict began. The war has already cost European taxpayers €3bn ($3.5bn) in additional fossil fuel imports. Meanwhile, OECD members have agreed with the International Energy Agency (IEA) to release 400 million barrels from emergency reserves to stabilise global oil markets. (Bloomberg)

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Why does this matter? Since the Russian invasion of Ukraine in 2022, which sparked an energy crisis, European countries have needed to diversify their imports of fossil fuels. Today, less than 10% of liquefied natural gas (LNG) and a similar amount of oil travels to the continent via the Strait of Hormuz. The Strait's effective closure is pushing up prices globally and Europe will need to compete with the Asian market, which is highly dependent on the Middle East for fuel imports, in securing LNG shipments. This adds pressure on the US, supplier of 60% of Europe’s LNG, to divert cargos to Asia, with at least nine tankers already rerouted at the time of writing.

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Massive disruption – The war has also caused the largest oil disruption ever recorded, according to the IEA. Global oil supply is projected to drop by eight million barrels per day in March – around 8% of the world’s demand. Gulf producers including Saudi Arabia, Iraq, Qatar, Kuwait and the UAE have cut output by 10 million barrels per day. The release of strategic reserves did little to bring oil prices down, which sit at around $100 per barrel and continue to fluctuate. For Europe, this means drivers face paying up to an extra €220 ($252) for fuel annually, while flight tickets could rise by at least 20%. The cost of manufacturing and transporting goods will also increase, meaning higher prices for already squeezed consumers.

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High dependency – Despite the EU’s push towards renewables, with wind and solar generating 30% of the bloc’s electricity last year, gas fired power plants still play a key role in its power mix. Fossil fuels are also the primary source of energy for sectors including heating and transport, demonstrating that continued reliance risks exposure to shocks emanating from elsewhere in the world. Pierfrancesco Maran, the new chair of the European Parliament’s Environment Committee, highlighted that the Middle East conflict shows that driving the energy transition is not only critical for tackling climate change but also for security, a sentiment shared by experts worldwide.

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Significant investment need – The European Commission said that delivering the transition will require an annual €660bn investment to 2030, rising to €695bn between 2031-2040. To help reach this goal, it has just adopted the Clean Energy Investment Strategy, which will use over €75bn of public financing delivered by the European Investment Bank over the next three years to de-risk projects and attract private capital. Meanwhile, EU Commission President Ursula von der Leyen said it had been a “strategic mistake” to turn away from nuclear power while noting that the Iran war has created a “stark reminder” of how importing fossil fuels leaves the EU vulnerable. At the same time, she announced that a €200m guarantee will be created to “support private investment in innovative nuclear technologies”, which will come from the Emissions Trading System.

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Stay green – Despite risks including higher inflation, rising interest rates and potential supply-chain disruptions – factors that previously undermined green strategies – Jefferies has advised its clients to stick with clean energy. The US-based global investment banking and capital markets firm argues that geopolitical instability will accelerate policies supporting energy independence. Elsewhere, analysts note that the ever-growing energy demand from AI data centres will also continue reinforcing long-term commitments to decarbonisation.