EU warns that Iran war will prolonge energy shock and force forced cuts

EU diplomats warned on Wednesday that if the Iran conflict continues, energy markets would face a 'prolonged supply shock, which could force fuel consumption to be cut.

The Strait of Hormuz has been effectively closed by the war, which is a major transit route for 20 percent of the world's oil as well as liquefied gas (LNG). Europe is not currently facing a shortage of fuel, but it is struggling with the rising price of oil and natural gas. Airports have warned that first shortages could occur within weeks.

Diplomats who attended the meeting said that the European Commission, in a closed door discussion with the ambassadors of EU member states on Wednesday, said that it was evaluating two scenarios.

Un spokesperson for the Commission declined to comment.

The Commission stated that if the U.S. lifts its blockade of the Strait and the ceasefire between the U.S., Iran, is maintained, then oil and gas flow will recover within a few month and prices are expected to fall. The Commission said that diesel and jet fuel would be cheaper by the end summer. However, the global LNG market would remain constrained until 2030 due to the damage caused to Qatar's infrastructure.

If tensions persist, the energy market would face extreme price spikes and a prolonged shock to supply, which could have ripple effects on supply chains across industries. The Commission stated that continued disruptions in oil supplies would lead to "demand destruction", which means reduced fuel use.

Europe may struggle to fill its gas storage before winter. According to diplomats, localised jet fuel shortages are also possible.

Europe's dependence on oil and gas imports leaves it vulnerable to spiraling global prices, even though its main suppliers are the U.S.A., Norway and producers outside of the Middle East. The Commission is currently drafting proposals to try and offset the energy 'fallout. The? previously reported on a draft that shows plans to reduce electricity taxes and to accelerate the adoption of clean technologies. This is to help Europe become less dependent on fossil fuels, and to protect it from future oil and natural gas shocks. (Reporting and editing by Alexander Smith; Reporting by Kate Abnett)

(source: Reuters)