ENERGY CRISIS - REALITY OR EXAGGERATION? - Filenews 8/3 by Andreas Poullikkas
The Strait of Hormuz, where about 20% of the world's oil passes, remained closed for a few days, while Iranian counterattacks on ships and infrastructure in neighbouring countries reduced production by 2 million barrels per day.
Despite the escalation, the price of Brent rose to around $81.40 per barrel, after an initial rise of 4.7%, with energy stocks strengthening and the aviation sector coming under heavy pressure.
The first reactions of the market
The conflict directly affects the supply of oil and gas, as Iran controls critical routes and infrastructure, through which about 90% of Iranian exports pass. Gas prices in Europe have already risen by about 15%, due to interruptions in liquefied natural gas (LNG) flows from Qatar and delays in routes through the Red Sea, while Goldman Sachs speaks of a "stress test" of the European energy system in terms of renewables and storage.
In the US, gasoline prices have risen by about 20 cents per gallon, adding to inflationary pressures, while various analysts predict Brent prices above $80 in the short term.
OPEC reacted by increasing production from Saudi Arabia and the United Arab Emirates by about 500,000 barrels per day, limiting the risk of an immediate, deeper, shock to the market. However, analysts such as the Soufan Center remind that attacks on critical targets could lead to a doubling of prices if combined with prolonged route closures and escalation of violence. In Asia, countries like India and China are already seeing increased import costs, with Iran covering about 10% of India's oil needs and being a major supplier for Chinese companies.
The three scenarios
In the Eastern Mediterranean and especially in Cyprus, the crisis fuels concerns about increases in fuel prices and additional pressure on the cost of electricity production. Countries in the region, heavily reliant on oil imports, face common challenges, including disruptions or delays on critical sea routes and rising freight rates. At the same time, electricity production from conventional fuels is under intense pressure, with an increased possibility of passing on the cost to electricity bills.
Below, three distinct scenarios of the evolution of the crisis are presented, which are based on the assessments of international firms, specialized energy analysts and security organizations, as well as the specificities of the European and Cypriot energy market. These scenarios do not aim to predict a single "outcome", but to investigate a range of possible disruptions in oil and gas supply, energy prices and the functioning of supply chains, in order to capture the economic, social and institutional impacts in a timely manner and to support the design of appropriate response policies.
Scenario 1: Short-term disruption
In the first scenario, which can be described as a short-term disruption, a limited-scale military escalation takes place, with targeted attacks on critical Iranian energy infrastructure. The disruption of oil flows is estimated at around 2 million barrels per day, with a focus on infrastructure such as Kharg Island, which handles about 90% of Iranian exports.
In this context, the price of Brent is expected to move in the region of $80-90 per barrel, while natural gas prices are increasing by about 10-15% due to temporary disruptions in LNG flows and increased supply chain costs.
OPEC's reaction with an increase in production by 500 thousand barrels per day, mainly from Saudi Arabia and the United Arab Emirates, acts as a "cushion" and limits the duration of the shock to 1-2 months.
In our country, such a scenario translates into a mild increase in fuel prices of 5-10% and a burden on the cost of electricity production of about 5%, but with a limited impact thanks to the existence of reserves and the short duration of the disturbance.
Scenario 2: Moderate Escalation
In the second scenario, the conflict escalates with intensified attacks, including actions by Iran's allies on maritime and energy targets. The region's oil exports decline further, driving the price of Brent into the $90-110 per barrel range, with a significant deterioration in volatility and investor sentiment. Disruptions in supply chains reach around 15%, with a clear impact on LNG maritime transport, particularly to Europe and Asia.
In this scenario, Goldman Sachs and other agencies warn of enhanced inflationary pressures, with the global economy seeing inflation increase of up to 2 percentage points, while Citigroup maintains a baseline scenario with Brent around $80, but with significant upside risk. In the Eastern Mediterranean, strategic stockpiles begin to run out within about 30-40 days, while increased costs and the prolongation of the crisis to a 3-6 month horizon intensify the pressure on import-dependent economies.
For Cyprus, this means a 10-20% increase in energy costs, increased electricity prices and the need to accelerate investments in renewable energy, storage systems and electrical interconnections, as well as strengthening our country's role as a critical hub in the context of the IMEC economic corridor.
Scenario 3: Complete Crisis – Generalized Regional War
The third scenario concerns a full-blown regional crisis, with a pan-regional war leading to an almost permanent closure of important routes and a deep and prolonged energy disruption.
In this case, Iranian oil exports collapse by up to 90%, while in the international environment there is a climate of prolonged fear and risk aversion. The price of Brent exceeds $120 per barrel and a noticeable slowdown in global economic activity.
For Europe, such a scenario implies a recession of -1% of GDP, as high energy prices squeeze production and consumption, while LNG shortages affect up to 70% of markets.
In Cyprus, the effects are particularly pronounced. Fuel shortages, increases in electricity prices that can exceed 20%, and a crisis duration of more than 6 months, with the need for emergency measures such as consumption rationing and urgent promotion of renewable energy projects and energy storage systems.
The Soufan Center and other analysts warn of risks in infrastructure, making it imperative to multiply sources of supply and routes, but also to strengthen the energy security of the Eastern Mediterranean.
More likely in the short term
In summary, the energy crisis stemming from the war in Iran appears to be highly likely in the short term, but less likely to develop into a catastrophic, long-term scenario, due to the existence of reserves, the possibility of diversifying suppliers and the relatively quick reaction of markets.
For Cyprus and the EU, the essence of the challenge is not only the magnitude of the shock, but mainly the speed with which energy, economic and institutional structures can adapt, in an environment of increased geopolitical uncertainty.
* Professor of Energy Systems, Frederick University
