Energy crisis with Iran is driving up inflation and killing industry in the EU

The European Union had years to prepare for an energy crisis after the 2022 shock. Thanks to a mild winter and ample supply from the United States, the European gas crisis was far less severe than many feared. However, the continent avoided blackouts and economic collapse largely thanks to a combination of good luck in terms of temperatures and excess capacity in the United States. Rather than acknowledge the luck factor, the European Union continued to fail to take serious measures to ensure security of supply, while some countries maintained a ban on the operation of nuclear power plants, which left them vulnerable to future energy shortages. Instead of creating a plan to lift bans on energy development, end the closure of nuclear plants, and lift restrictions on investment, the European Union preferred to bury its head in the sand, hoping that nothing would happen.

New shock worse than 2022

Europe is sleepwalking towards a new energy crisis, which could be worse than the shock of 2022. War in the Middle East, a new diplomatic crisis between Spain and the US, ongoing tension with Algeria and continued dependence on Russian gas have combined to send oil and gas prices soaring, threatening the already fragile European economy. The escalation of the war with Iran has affected most shipping through the Strait of Hormuz. Daily ship traffic in the strait has fallen from 138 to just 20 ships, according to ship-tracking data. Kuwait and Qatar have declared force majeure, meaning all existing contracts can be renegotiated in terms of volume and price, while Kuwait and the United Arab Emirates have reduced crude oil production due to threats from Iran. Brent crude is already near $100 a barrel, up 21% in a week — the biggest weekly gain in five years. Gasoline prices in the US have hit $4 a gallon, still below their 2021–2023 average. But for Europe, the picture for natural gas is even more worrisome. The Dutch TTF natural gas benchmark has surged 50% in the week — the biggest gain since the summer of 2023. The April 2026 TTF contract hit $58.42/MWh from $37/MWh just a week ago. Implied volatility in TTF futures has quadrupled since January. Qatar, the world’s second-largest exporter of liquefied natural gas (LNG), has halted production at its Ras Laffan Industrial City field, the world’s largest liquefaction facility, and issued force majeure notices. Qatar and the United Arab Emirates supply more than 20% of the global LNG market and are now out of service. According to Kpler, even taking into account all alternative sources, the available supply is less than 2 million tons per month, compared to a loss of 5.8 million tons per month. Europe was unprepared for this disruption and has done very little to guarantee long-term supply. Invoking force majeure allows suppliers to manage contracts in the most efficient way possible, taking into account risks — something crucial in a period of shortages and the need for flexibility.  

What did China do?

China has made security of supply a priority. LNG ships that were originally headed for Europe are now being diverted to Asia. Why? Because Asian spot premiums are now exceeding European prices, sending the strongest arbitrage signal since 2022. A “stronger arbitrage signal” means there are stronger indications or greater opportunities to exploit a market imbalance. This week alone, three ships carrying LNG from the US and Nigeria have changed course to Asia. Europe is losing the international “bidding war” for flexible cargoes. At the same time, European natural gas stocks have fallen to their lowest levels in years. Europe needs large imports of cargoes in the spring and summer to refill its storage facilities even after the supply period ends on March 31. This process will be more difficult and much more expensive due to increased competition for LNG and potential disruptions in supply chains exacerbated by geopolitical tensions. The deterioration of Spain’s diplomatic relations with the US adds another dangerous dimension. The change in foreign policy of the Pedro Sánchez government, with provocative rhetoric and positions seen as hostile to American interests, has isolated Madrid diplomatically at the worst possible moment. Spain’s largest LNG suppliers are Algeria and the US. However, the Sánchez government has provoked diplomatic crises with both countries.   Spain’s six regasification terminals are crucial for distributing LNG to Europe — but only if cargoes arrive. In a market with limited supply, where the US is the largest LNG exporter, a diplomatic crisis with Washington is not just a political problem; it is an energy supply risk. Spain’s poor diplomatic relationship with Algeria over the Western Sahara issue has also led to a reduction in Algerian gas supplies to Spain. The risk of another Russian gas outage is growing even more. Although Europe has reduced its dependence on Russian pipeline gas from 40% to 15% by 2022, significant flows continue — mainly via the TurkStream pipeline to southern and southeastern Europe. European purchases of Russian gas exceeded 40 billion cubic meters in 2025, worth about 15 billion euros. Despite a plan for a complete shutdown by 2027, the EU continues to import large quantities of Russian LNG — notably to Spain, France and Belgium — making Russia the second-largest supplier in the third quarter of 2025 with a 12.7% share. Spain, the fifth-largest importer, bought 114 million euros worth of LNG from Russia in January. France’s LNG imports from Russia rose by 57% in a month, according to the Centre for Research on Energy and Clean Air. A complete shutdown of Russian supplies, combined with disruptions in the Middle East and a possible reduction in US supplies, could plunge Europe into an unprecedented energy crisis, possibly even including energy rationing. Germany’s industrial recession, now in its third year in a row, will worsen. Spain, Italy and the economies of Central Europe will face double-digit increases in energy costs and a significant drop in industrial production and consumption. The International Energy Agency’s winter assessments had repeatedly warned of a serious disruption in natural gas supplies and a surge in energy prices. But no one in Brussels listened. Now the scenario is unfolding.  

The Cost of Survival in 2022

Europe’s political class spent three years congratulating itself on surviving the 2022 energy crisis. But this “survival” was achieved by destroying demand, dismantling industries, curbing consumption and paying much higher prices. The structural problems of the European energy sector were never addressed. Meanwhile, domestic production fell, nuclear capacity was curtailed and dependence increased, while bureaucracy made it even more difficult to invest in energy security. Now, with oil approaching $90–100 a barrel, gas prices doubling in a week, the Strait of Hormuz effectively closed, Qatar’s LNG off the market, and some countries engaged in diplomatic clashes with their most important energy ally, Europe is facing the consequences of its own inaction. The European energy crisis is a clear threat. European leaders must listen to industry experts and respond with reason, not ideological fantasy, recognizing the danger of the crisis. Unfortunately, many European leaders live with the comforting illusion that someone else will solve the problem. Others, like Pedro Sánchez, seem to prefer the crisis, hoping for some vague political benefit that will distract attention from the corruption scandals he is facing — something that ultimately hinders effective action and prolongs the resolution of the crisis.