High oil prices, high gas prices, and high electricity prices are hitting hard! How will Europe get through a new round of energy crisis?

Why is Europe more vulnerable than the United States during the energy crisis?

On the 19th, several Middle Eastern countries reported that their energy facilities were attacked by Iranian missiles and drones. This has sparked strong concerns in global markets about supply shortages and may lead the EU to face a more prolonged energy price shock.

As a result, on March 19th, natural gas prices soared to their highest level in three years, with the European benchmark price (Dutch TTF Natural Gas) closing at €61.852 per megawatt-hour, an increase of over 93% in the past month. Meanwhile, the oil market also reacted sharply; at the time of writing, Brent crude oil prices had risen to $103.77 per barrel, a monthly increase of 46.76%.

At the European Council meeting on the 19th, EU leaders expressed concern. Italian Prime Minister Meloni warned that the current energy situation is extremely severe; French President Macron also stated that if production capacity itself is damaged, the impact will be more lasting. Dutch Prime Minister Rutte said that if attacks on energy facilities cannot be stopped, “the global impact could become very serious.”

Lorenzo Codogno, former chief economist of Italy’s Ministry of Economy and Finance and visiting professor at the London School of Economics’ European Institute, told Yicai that the duration and intensity of the conflict will be key to determining the final impact. If energy prices only spike for a few weeks, monetary policy may not need major adjustments, and prices could return to normal by late summer or year-end. However, based on current geopolitical logic, this hope is probably “wishful thinking.”

“Although today’s Eurozone is better prepared to handle energy shocks due to more diversified supply sources, this energy price shock is faster, more severe, and broader in scope than during the Russia-Ukraine conflict (which mainly involved natural gas). The impact on inflation could still be very intense,” he said.

The Shadow of the Energy Crisis

According to CCTV News, earlier this month, QatarEnergy announced that due to drone attacks from Iran on two of its facilities, it would suspend liquefied natural gas (LNG) production. Qatar, the world’s third-largest natural gas reserve holder, is one of the most important natural gas producers globally.

Adding to the woes, this week the base suffered “further widespread damage” from ballistic missile strikes. Saad Sherida al-Kaabi, CEO of QatarEnergy, warned on the 19th that repairing the damage could take three to five years, and said Belgium and Italy would be affected because the company can no longer fully meet its contractual production obligations.

This sharp contraction in supply is triggering a series of economic chain reactions. The European Central Bank forecasts that long-term supply disruptions could push eurozone inflation to 6.3% and trigger a short-term recession. EU data shows that in just the past two weeks, soaring prices have caused Europeans to pay an additional €7 billion in energy bills. EU Economic Affairs Commissioner Donohoe previously said that ongoing energy pressures could reduce economic growth forecasts for 2026 by 0.4 percentage points, well below the earlier 1.4% growth projection.

It’s worth noting that EU officials initially believed the Middle East crisis would only cause price volatility rather than supply shortages, but this optimism has shifted. The EU Oil Coordination Group’s minutes from the 19th state: “The security of oil supply will depend on the duration and escalation of the conflict. If the flow of energy through the Strait of Hormuz is interrupted long-term, the EU will reassess its oil supply security.”

Codogno said that the impact of energy prices on Europe could be much more severe than currently expected. “First, the conflict may not end soon. Second, damage to some Gulf region energy infrastructure could be permanent, meaning it could take years to restore previous capacity. Therefore, preparations for shocks are necessary,” he explained.

Daan Struyven, co-head of Goldman Sachs’ Global Commodities Research and head of Oil Research, also analyzed Europe’s unfavorable position for Yicai. He said that compared to the US, which is only affected by high oil prices, Europe is suffering from a triple blow of high oil, gas, and electricity prices. Since about 60% of European electricity is priced based on natural gas, this high coupling makes Europe more vulnerable to energy crises than Asia and the US.

EU’s Response Measures and Policy Battles

At the summit on the 19th, EU leaders called on the European Commission to “immediately propose a targeted set of temporary measures” to address soaring energy prices and avoid a repeat of the 2022 energy crisis. However, many officials acknowledged that, given the scale of the global market shock, policy levers have limited room for hedging.

On the same day, EU Commission President von der Leyen proposed a series of “temporary, tailored, and targeted” intervention plans. She suggested that member states use national aid measures, such as fiscal subsidies, to offset power generation costs and fuel expenses. The EU also plans to introduce new legislation on grid charges to improve efficiency and proposes lowering electricity taxes below current levels, which are already relatively low compared to natural gas.

In terms of structural policies, von der Leyen proposed fine-tuning the EU carbon market to stabilize carbon allowance prices, thereby reducing industrial electricity costs. Currently, the EU Emissions Trading System (ETS) accounts for an average of 11% of industrial electricity bills, but in countries like Poland with high fossil fuel generation, this ratio reaches 24%. Ten member states, including Italy and Poland, have proposed suspending or diluting ETS rules to ease industrial burdens. However, this proposal faces opposition from countries like the Netherlands and Sweden, which worry it could undermine the EU’s core climate policies.

German Chancellor Mertens stated that the ETS system is considered a “major success” and should not be fundamentally changed, but some minor adjustments could be made before summer to reach a compromise. Von der Leyen also hinted that, while maintaining the resilience of the ETS, considerations for free allowances after 2034 and electricity prices for heavy industry are on the table.

Additionally, the European Commission plans to activate the “Market Stability Reserve” (MSR) in the coming days to help smooth excessive price fluctuations. “We need to modernize it to make it more flexible,” von der Leyen said.

However, ECB President Lagarde warned on the 19th that governments should avoid excessive economic interventions. She stated: “Any fiscal response to energy price shocks should be temporary, targeted, and carefully tailored.”