Oil prices are "spiking," industry is "slipping," and people's livelihoods are "under pressure"

A month after the United States and Israel launched military strikes against Iran, the impact of the geopolitical conflict has quickly spread to Europe. From surging oil and gas prices to tight electricity supply, from shipping disruptions to rising corporate costs, a chain of knock-on effects is becoming increasingly apparent.

International observers believe that Europe is highly dependent on external energy supplies, and this round of shocks has again exposed its structural vulnerabilities. The spillover effects of the fighting have become a key variable for testing Europe’s economic resilience, and they are also forcing Europe to reexamine energy self-reliance and its industrial structure.

Oil prices “run hot”:

Inflation returns alongside supply concerns

The situation in the Middle East has remained tense, directly driving up energy prices in Europe. Although the International Energy Agency has pushed for the release of the largest-ever strategic oil reserves, the Europe region has seen little practical benefit, and oil prices have still stayed at high levels.

European Commission President von der Leyen said earlier that since the outbreak of the fighting, the EU’s oil and natural gas import bills have increased by an additional roughly 6 billion euros. The Dutch Ownership Transfer Center (TTF) natural gas futures price, which serves as a European natural gas benchmark, rose by nearly 80% month-on-month. London Brent crude oil futures rose more than 40% month-on-month.

Europe is facing not only pressure from rising oil prices, but also pressure from coupled increases in natural gas and electricity prices. Goldman Sachs analyst Daan Struyven believes that because about 60% of Europe’s electricity prices are determined by natural gas, Europe is more vulnerable amid energy-crisis shocks.

Recently, institutions have widely revised downward their expectations for Europe’s economic outlook. On the 26th, the OECD released a report, lowering its forecast for this year’s economic growth in the eurozone to 0.8% and raising its inflation forecast to 2.6%. Earlier, the European Central Bank cut its forecast for eurozone economic growth this year to 0.9% and raised its inflation forecast to about 2.6%.

What is worth watching is that risk is evolving from “rising energy prices” to “unstable supply.” Wael G. Sawan, CEO of oil major Shell, warned that if crude oil transport disruptions in the Middle East continue, Europe could face fuel shortages within weeks. Katrin Leiss, Germany’s Federal Minister for Economic Affairs and Energy, said that if the conflict continues, Europe’s pressure on energy supply may become concentrated from late April to May.

Industry “falls behind”:

Energy and logistics squeezed from both sides

As early as after the escalation of the Ukraine crisis, European industry has been absorbing pressure from high energy costs after phasing out Russian natural gas, and the U.S.-Israel-Iran war further amplified the shock. As a foundation energy source for the transportation system and an important raw material for industrial production, rising oil prices not only directly increase logistics costs, but also transmit from the raw-material side to various industrial products, creating persistent squeeze on energy-intensive industries.

Against the backdrop that the impact of U.S. tariff policies has not yet faded, European companies are simultaneously facing multiple pressures, including energy prices staying high, logistics costs rising rapidly, and weak external demand. The operating environment for manufacturing has tightened noticeably, and risks are shifting from “rising costs” to “imbalances across the supply chain.”

At the macro level, high energy prices and supply uncertainty are forming a systemic shock to Europe’s manufacturing industry, with countries such as Germany and Italy bearing the brunt. ECB President Lagarde said that businesses are more sensitive to cost changes; price transmission accelerates, meaning energy shocks will be passed to downstream parts of the industrial chain more quickly, further reinforcing inflation persistence.

At the industry level, agriculture, chemicals, and automobiles are the sectors hit hardest. Carsten Bretschki, head of macro research at ING, said these industries are already affected by U.S. tariffs and weak demand, and with the added rise in energy costs, they are now bearing “multiple squeezes.”

Lorenzo Poli, CEO of Italian paper company Sappi, said the related impacts are gradually being passed on to end products and may spread to everyday consumer goods such as paper products. Axel Ebbecke, CEO of German micro-particle manufacturing technology firm Ebek Process Technology, said that due to rising shipping risks in the Middle East, raw-material transport needs to be rerouted via the Cape of Good Hope in Africa, and transport costs have risen by about 40%.

People’s lives “tense”:

Emergency policies stepped up in bulk

Rising energy prices affect household spending on transportation and energy, leading to lower residents’ purchasing power and squeezing other consumption spending. At the same time, heavier energy burdens erode consumer confidence, and residents’ consumption expectations in the eurozone’s major economies have clearly weakened.

Samina Suden, an economist at the German Institute for Economic Research, said that the increase in costs is gradually being passed on to end-consumer markets, putting upward pressure on product prices in areas such as baking and dairy processing. As feed costs such as corn and soybeans rise, meat prices may be pushed up as well, further increasing the burden on residents’ daily lives.

Faced with the shock, European countries have rolled out dense packages of response measures. Spain launched a package worth 5 billion euros, including about 80 measures such as reducing energy taxes and providing subsidies to the transport and agriculture sectors. Italy implemented fuel tax relief. Poland plans to cut fuel value-added tax. Serbia has cumulatively reduced excise taxes on crude oil consumption by 60%.

Against the backdrop of high oil prices, European residents and businesses have shown noticeably increased attention to renewable energy. Greg Jackson, founder and CEO of UK Octopus Energy, said that since the outbreak of the Iran war, the company’s sales of solar panels and heat pumps have risen significantly. Data from a German online car trading platform show that since early March, electric vehicles’ share in user searches rose from 12% to 36%. In the French market, electric vehicle sales share has also risen noticeably in the short term.

International observers said that measures such as tax cuts and subsidies in various European countries have, to some extent, offset the short-term shocks. However, fiscal space has been continuously consumed, and the sustainability of policies faces challenges. From the Ukraine crisis to the fighting in the Middle East, repeated external energy-risk shocks are continually exposing Europe’s structural vulnerabilities in dependence on the outside world, forcing Europe to consider structural adjustments, a green transition, and pathways to sustainable development.

(Xinhua News Agency, Berlin, March 28)