With fighting raging in the Middle East, the EU is hoping it can avoid a repeat of last year’s energy crisis.
Last winter, Europeans faced exorbitant energy bills as the Continent rapidly weaned itself off Russian gas. This year the EU is better prepared — but now a second war also threatens to roil its energy markets.
The conflict between Israel and Hamas threatens to disrupt Europe’s relationships with the Middle East, or even draw Iran into direct confrontation with Israel and its Western partners. While markets are relatively calm for now, either of those scenarios could cause chaos.
Nevertheless, Europe is “equipped to face oil and diesel global market tightness,” Energy Commissioner Kadri Simson told POLITICO in an interview. Officials have learned lessons from Russia’s war on Ukraine, and are working to build “a good understanding of all our vulnerabilities to best address them and how we can be prepared for any incidents or emergencies.”
EU officials have held a slew of meetings with oil-producing nations in recent weeks, both old friends like Norway and emerging partners such as Algeria and Nigeria, to get ahead of any potential disruptions, she said.
“After the Gaza crisis unfolded, we are faced with two conflicts in the European neighborhood. The Eastern Mediterranean is an important theater for European energy security, as Europe’s energy transition is still entangled in geopolitical uncertainties,” Simson said, attributing the lack of drama in the markets to “the preparedness and crisis management that the EU put in place to respond to Russia’s energy blackmail.”
Fighting in Gaza and, to a lesser extent, along Israel’s northern border with Lebanon has had only a limited impact on oil markets. Prices initially rose on the news of the attack by Hamas militants on October 7 and Israel’s massive response, but key crude benchmark Brent dropped back by 4.2 percent this week to around $81 per barrel, around the levels seen before the start of the violence.
Markets have avoided a repeat of 1973, when the Yom Kippur War between Israel and its neighbors prompted the big Arab producers, led by Saudi Arabia, to embargo their exports to Israel’s allies. Gulf country relations with Israel have improved markedly in the past 50 years: The UAE and Bahrain recognized its sovereignty under the 2020 Abraham Accords, while Saudi Arabia is in negotiations to do the same.
Traders are therefore betting that as long as the conflict doesn’t expand, supplies of oil will remain more or less stable, said Viktor Katona, lead crude analyst at energy intelligence firm Kpler.
The risk stems more from Iran, he said. In the worst case, an expansion of the conflict could cause Iran to disrupt shipping from Gulf Arab countries through the Strait of Hormuz. Iran’s own crude oil, while sanctioned by the West, is exported in large quantities to China. “If Israel starts to strike the Iranian territory and Iran as a consequence needs to export less, then China doesn’t have enough crude and needs to buy from somewhere else,” sending global prices rocketing, Katona said. “It’s an entire spiral that gets triggered immediately.”
While Iran’s theocratic leadership has consistently vowed to destroy the state of Israel and publicly endorsed Hamas’ attacks last month, it denies involvement in their planning and execution. The Israel Defense Forces say they have carried out strikes on militant groups in Syria with close links to Iran’s Islamic Revolutionary Guard Corps, but have so far stopped short of hitting targets inside Iran itself.
Lessons learned
Gas markets felt a more immediate impact from the war. Israel turned off the taps at its Tamar offshore gas field in the hours following Hamas’ surprise attack, amid reports that it was a target for rocket attacks. While Israel produces only relatively small quantities of natural gas — around 21 billion cubic meters last year, compared to Russia’s 618 billion — it is a key exporter to neighboring Egypt, and the downtime worsened regular rolling power outages there. The flow has since been resumed, albeit in smaller quantities.
Any escalation with Iran could affect gas as well as oil markets, given a third of the world’s liquefied natural gas and a sixth of its oil is shipped through the Strait of Hormuz. “If things stay as they are there’s no problem, but if there’s a war where Iran was included and they [block trade through] the Hormuz strait then prices will go up for sure,” said one EU diplomat with knowledge of internal energy strategy talks, granted anonymity to speak candidly.
However, “all the big players want to avoid escalation, Iran wants to avoid this” because of threat of sanctions, the envoy insisted.
Absent that dire scenario, the impact on EU gas markets is likely to be limited, says Tom Marzec-Manser, head of gas analytics at commodities intelligence company ICIS — but more because of the last conflict than the most recent one.
“From a European gas pricing perspective, we’re still looking relatively OK and that’s been driven largely by weak demand. Many industrial consumers continue to use noticeably less gas than they did prior to the energy crisis last year, so consumption in Europe has remained low,” he said.
According to the European Commission, member states collectively shaved almost 20 percent from their natural gas use in the run-up to last winter, with industry slowing output and renewable power playing a much larger role in electricity generation. Despite that, consumption actually rose in October for the first time since the start of the war, in an early sign that businesses could be tentatively trying to restore lost productivity.
But even though the bloc’s gas reserves are more than 99 percent full ahead of schedule, prices have still remained stubbornly high across the Continent compared to other regions. That means Europeans are more at risk of short-term spikes in the cost of energy, with industry potentially having to slow down again if bills become unaffordable.
“We are in a much better situation than in 2022,” said Georg Zachmann, a senior fellow at the Bruegel energy think tank. “We have more heat pumps, power plants are back in the picture that we didn’t have available last year, and we’ve built more liquified natural gas terminals.” However, he warned, if member states lose focus on reducing demand and try to give their own industries a head start with subsidies, that could spark a wasteful race “that is essentially to everyone’s detriment.”
At the same time, winter in Europe isn’t what it used to be. Record-breaking temperatures have been recorded across the globe for the past four months, according to an EU Copernicus satellite monitoring report published this week, while last winter was the second-warmest ever recorded on the Continent. While that might be good news for conflict-prone fossil fuel supplies in the short term, it’s probably bad news for just about everything else in the not-so-much-longer term.
Source : Politico