An extended jump in world energy prices could have drastic consequences for Europe, a huge net importer of oil and gas, squeezing costs for businesses and households and having a chilling effect on both investment and consumption. That in turn could lead to demands for a fresh round of expensive energy subsidies from EU governments that are still grappling with the after-effects of the last such spike four years ago, when Russia invaded Ukraine.
While the rise in energy prices might push inflation higher, the European Central Bank has signaled it wouldn’t automatically respond to that by raising interest rates.
Iran’s foreign minister said at the weekend that it was not seeking to close the Straits of Hormuz, the chokepoint at the mouth of the Persian Gulf. But Reuters reported Iran’s Revolutionary Guard as ordering the opposite, and Iranian forces also attacked three tankers. That has been enough to stop most ships from trying to enter or leave the Gulf.
The oil market “is the main market to watch, today and for the duration of this episode,” a Deutsche Bank strategist, Jim Reid, wrote in a morning note. “How firmly, or officially closed, the Strait of Hormuz remains will probably play a big part in this.”
Reid noted that markets had gone into the weekend calculating that the looming midterm elections would limit the U.S. administration’s appetite for an extended conflict. Such assumptions may have to be revised if the Iranian leadership continues the struggle, as it vowed it would at the weekend.
The eruption of war had impacts far beyond energy markets. The euro and the pound fell over a cent against the dollar, an unusually large move. Meanwhile, EU government bond yields rose and European stocks all fell sharply, with notable exceptions among energy companies, miners and defense contractors.
Conspicuously, Russian markets fared less badly than many, with the ruble nearly holding its own against the dollar. The jump in oil prices means that the Kremlin will receive more for its key export, improving its ability to continue its war in Ukraine.