A drawn-out war in Iran that chokes the supply of oil from the Gulf could create a “substantial” economic shock to Europe, the European Union’s economy commissioner Valdis Dombrovskis has warned.
Long-term disruption to global oil supply and the key shipping route through the Strait of Hormuz would continue to drive up energy prices, leading to broader inflation in Europe, the EU commissioner said.
European governments are mulling interventions aimed at easing the spiking price of oil. They are keen to prevent any repeat of the cost-of-living crisis that followed the steep inflation and big increase in energy costs after Russia invaded Ukraine four years ago.
Ministers for finance from the Group of Seven (G7) countries said they were prepared to release emergency oil reserves into the market if necessary, to stabilise the situation.
“We’ve agreed to monitor the situation very closely,” France’s minister for finance Roland Lescure said after a video call with his G7 counterparts.
[ Oil and gas prices are now in the economic danger zoneOpens in new window ]
A lengthy regional war in the Gulf that drove up inflation could have a “very significant” impact on large parts of the Irish and European economy, Tánaiste and Minister for Finance Simon Harris said.
“This is a conflict that is a week old, and at the moment it’s hard to predict whether this is something that lasts for a period of more days or weeks, or indeed something that lasts for months,” the Fine Gael leader said.
The best way to bring down the cost is to increase supply, he said. “We really need to see what can be done in relation to that in the hours and days ahead.”
Harris, speaking in Brussels before a meeting of EU finance ministers, said any substantial rise in inflation would have a much wider economic impact than concerns about energy prices.
“If you got into a prolonged conflict in the Gulf region, the inflationary impact of that could be very significant for whole swathes of the Irish economy,” Harris said.
The note of caution was echoed by Dombrovskis. “In a more benign scenario where the conflict is contained within a couple of weeks, one can expect it will not have a major effect on the global and European economy,” he said.
Greek finance minister Kyriakos Pierrakakis, who chaired the Eurogroup ministers meeting on Monday, said the EU was in “crisis-management mode” and the focus was on protecting European households from “significant spikes” in the price of energy.
Spain’s economy minister Carlos Cuerpo said European states need to co-ordinate any response, as they did following the energy crisis triggered by the invasion of Ukraine.
“One key lesson was we need to go hand in hand, we need to co-ordinate all potential subsidies, actions, tools that we will put in place to protect our economies,” he said.