EU warns of prolonged energy shock, forced cuts if Iran war continues
- EU sees two scenarios for Iran war energy fallout, diplomats say
- Continued crisis seen forcing energy demand destruction
- Ceasefire, opening of strait could ease prices within months
The European Union warned member countries on Wednesday that if the Iran conflict continues, energy markets will face a prolonged supply shock that would force cuts to fuel consumption, EU diplomats told media.
Global energy supplies are reeling from the war's effective closure of the Strait of Hormuz, usually a transit route for 20% of the world's oil and liquefied natural gas (LNG).
Europe has not yet faced supply shortages, but is grappling with soaring oil and gas prices and airports have warned the first jet fuel shortages could hit within weeks.
In a closed-door meeting with EU countries' ambassadors on Wednesday, the European Commission said it was considering two main scenarios, diplomats with knowledge of the talks said.
A Commission spokesperson declined to comment.
In a scenario where the ceasefire agreed between the U.S. and Iran holds, and the U.S. blockade of the strait is lifted, oil and gas flows would recover in a few months and prices should decline, the Commission said.
Diesel and jet fuel prices would ease later, by the end of summer, while the global market for LNG would remain tightened until 2030, due to damage to infrastructure in Qatar, it added.
But if tensions continue, energy markets would face a prolonged supply shock and extreme price spikes, with ripple effects across industries' supply chains. Continued oil supply disruption would increasingly force "demand destruction" - meaning reduced fuel use, the Commission said.
In this scenario, Europe could struggle to fill its gas storage ahead of winter. Localized shortages of jet fuel are also possible, the Commission said, according to the diplomats.
Europe's reliance on oil and gas imports has left it exposed to spiraling global prices - even though its top suppliers are the U.S., Norway and other producers outside the Middle East.
The Commission is drafting proposals to attempt to offset the energy fallout. A draft, previously reported, shows plans to cut electricity taxes and seek to scale up clean technologies faster, to slash Europe's dependence on fossil fuels and protect the bloc from future oil and gas shocks.
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