[Insight & Opinion] Middle East Crisis and Europe's Energy Emergency

Europe May Consider Easing Sanctions on Russia
If Crude Oil and Gas Import Burden Increases

It has been almost two years since the war in Ukraine began. As part of strong sanctions against Russia, the United States and Europe imposed an energy embargo on Russia. Russia is an energy powerhouse, holding about 6% of the world's crude oil reserves and about 24% of gas reserves. Europe sought alternative energy suppliers from the Middle East and North Africa. This region accounts for about 57% of the world's crude oil reserves and about 41% of gas reserves. It also handles about 50% of global crude oil exports and about 15% of gas exports. In 2023, Saudi Arabia, Libya, Iraq, and Algeria supplied more than a quarter of the European Union (EU)'s crude oil demand, while Algeria, Qatar, Oman, Libya, T?rkiye (Turkey), and Egypt supplied about one-third of the EU's gas demand. This region is therefore particularly important for Europe's energy security. However, when the conflict between Israel and the Palestinian armed group Hamas intensified following Hamas's surprise attack on October 7, the repercussions immediately affected Europe. Gas prices in Europe surged by about 35% shortly thereafter due to concerns over instability in the region responsible for Europe's energy supply. The gas from this region, which became an alternative to Russian gas, is more expensive and harder to transport, increasing Europe's cost burden. If the Israel-Palestine conflict escalates further, the burden will grow even more. The problem is that this conflict has the potential to expand. As the Israeli military intensifies airstrikes and ground operations in the Gaza Strip, Iran's Supreme Leader Ali Khamenei recently called on OPEC member countries to ban exports to countries supporting Israel. This recalls the 1973 oil embargo. Iran's President Ebrahim Raisi also appealed for a joint response from the Islamic world.

If the 'axis of resistance' countries in the Middle East opposing Israel?such as Iran, Yemen, Iraq, Syria, and Lebanon?join and the conflict escalates into a full-scale war, it is expected that they will block key energy transport routes. In particular, the blockade of the Strait of Hormuz, through which more than one-fifth of the world's crude oil supply and about one-third of liquefied petroleum gas (LPG) supply pass, would be a fatal blow to energy supplies not only in Europe but worldwide. If this strait is blocked, tankers departing from the Persian Gulf would have to navigate around the southern tip of Africa to reach Europe, significantly increasing costs and transit times.

In such a scenario, Europe may have to reconsider whether to continue importing crude oil and gas from non-Russian regions at high prices or to ease sanctions on Russia. However, such a shift would be a humiliating retreat for Europe. On the 30th of last month, the World Bank analyzed the impact of the Israel-Palestine war on oil prices and projected that in the worst case, if major Arab oil-producing countries reduce exports, global oil supply could decrease by 6 to 8 million barrels per day, pushing oil prices up to $140 to $157 per barrel.

Will the worst-case scenario occur? Nouriel Roubini, a professor at New York University, recently assessed that there is a 65% probability that the Israel-Palestine conflict will not escalate into a widespread regional war, and a 35% probability that it will escalate and cause stagflation in the global economy. However, he expressed concern that the market is currently underestimating the escalation probability at about 5%. It is too early to be reassured about the direction of this conflict, which contains very high uncertainty.

Kim Dong-gi, author of 'The Power of Geopolitics'

This content was produced with the assistance of AI translation services.