After the United States and Israel began their military attacks against Iran on February 28, oil and gas markets were plunged into chaos and energy prices skyrocketed.
Brent crude oil prices are 20% higher than at the end of February. They went from hovering around $70 a barrel in late February to quickly surpassing $100, before falling to around $90 on March 10. The main reason for the drop was President Trump’s announcement, to calm the markets, that the war will end “very soon.”
The drop in oil prices is reminiscent of the events that followed the “Liberation Day” tariffs of April 2025. Following the announcement, stock markets plummeted, but when Trump suspended the tariffs – just days later – the stock market responded with a new rise, just as oil prices have fallen in response to his assurances about the end of the war.
If the war is truly coming to an end, markets may be right to start lowering prices, but there is a caveat to this optimism. War is not the same as tariffs: the US Administration can impose and suspend tariffs, but if Iran rejects possible conditions to end the conflict, it will continue.
Despite Trump’s announcement, it remains unclear when Middle East production will return to normal and the vital Strait of Hormuz shipping route, through which 20% of the world’s oil passes, will return to normal.
Therefore, it is extremely difficult to predict when prices will drop to levels similar to those in February. This is of great concern in Europe, which relies heavily on imported energy sources.
How oil crises affect Europe
Rising oil prices are different from other economic crises because they have a direct and immediate effect. For consumers, it means an instant increase in gasoline and energy prices. For producers, it means an immediate increase in the cost of manufacturing and delivering products.
To understand the potential damage to the EU economy, we can take a look at the bloc’s oil consumption and production patterns.
The EU imports most of its oil and gas, meaning that in addition to rising prices, access and supply may also be limited by the war in the Middle East.
However, on the positive side, Europe has seen a steady decline in total energy consumption and an increase in renewable energy production. With the widespread use of electric and hybrid cars, many consumers will be protected from immediate impacts such as rising prices at the pump.
Diversity of energy sources and more efficient technologies mean it is better protected than during, for example, the oil crisis of the 1970s. However, some countries and industries will be more affected than others.
The EU’s main energy consumers are its largest economies: Germany, France, Italy and Spain. These countries will be the most interested in controlling the increase in retail fuel prices. Road transport accounts for the majority of oil consumption (about half). Other high energy consumption industries on the continent are chemicals, paper and steel.
What can Europe do?
Following an oil crisis, both inflation and unemployment tend to rise, posing a dilemma for any central bank. You can reduce inflation by raising interest rates, but this also leads to more unemployment: rising borrowing costs slow growth and business activity, leading to layoffs.
Therefore, the European Central Bank (ECB) must choose what is more important, whether to meet its objective of keeping inflation under control (around 2%) or to protect jobs.
In February 2022, Russia’s invasion of Ukraine disrupted the continent’s gas supplies, causing electricity prices to rise. To understand what is on the table today it is worth analyzing what the ECB and the European Commission did then to help EU citizens.
In July 2022, the ECB chose to raise interest rates (which were then at -0.5%) and continued to raise them until they reached 4% in September 2023. But the situation was very different then, as the economy was still recovering from the large rise in inflation (9% in June 2022) caused by the Covid-19 pandemic.
Interest rates now stand at 2% and the ECB will have to decide which risk is greater: a rise in inflation (which was 1.9% in February, below the 2% target) or a rise in unemployment.
Beyond monetary policy
The European Commission and national governments have more direct and effective ways to deal with the oil crisis. During the 2022-2023 energy crisis, the Commission launched several initiatives to stabilize energy prices, including recommendations to minimize consumers’ energy consumption.
Perhaps most importantly, price caps and measures were also put in place that allowed national governments to directly help their citizens, such as joint gas purchases across the continent.
At the national level, governments have the option of borrowing to finance subsidies, as many did in 2022. However, this option is less viable than in that year as interest rates are now higher. Investors will be wary of the fact that many EU countries, including France, Italy and Spain, have public debt exceeding 100% of their GDP. These governments were some of the most active during the last energy crisis and also the most exposed to the current oil crisis.
The EU now faces a real risk of recession. If there is any silver lining, it is that it can give the continent a much-needed boost towards renewable energy development, but even this will depend on how the governments of European countries address the crisis.
Sergi Basco, Associate Professor of Economics, University of Barcelona
This article was originally published on The Conversation. Read the original.
