Energy shock exposes Europe’s vulnerability as oil prices surge

Rising tensions in the Middle East are triggering a sharp divergence in global oil prices, with significant consequences for Europe’s energy security and economic outlook, according to London Business School’s Dr Linda Yueh.

Speaking on SiriusXM’s Business Briefing, Yueh highlighted the growing gap between US benchmark West Texas Intermediate and Brent crude, underscoring a key structural difference: energy independence. While the US remains relatively self-sufficient, Europe is far more exposed to global supply shocks, particularly those originating in the Middle East.

That exposure is now being tested by escalating conflict involving Iran, which has already disrupted oil and gas flows at a scale surpassing previous crises. Yueh pointed to warnings from the International Energy Agency that the current situation represents the most severe global energy security threat on record, with supply losses exceeding those seen during the oil shocks of the 1970s.

Oil prices have surged towards $120 per barrel and could climb higher, potentially surpassing peaks reached after Russia’s invasion of Ukraine or even the record highs of 2008. Crucially, Yueh noted that prices are being driven not only by physical shortages but also by heightened uncertainty in global trading markets, where cargoes are bought and sold multiple times before reaching their destination.

Key chokepoints such as the Strait of Hormuz remain central to the outlook. Accounting for roughly a fifth of global oil transit, any prolonged disruption there would disproportionately affect European economies. Rising insurance costs and the prospect of military escorts for tankers further underline the fragility of supply routes.

Unlike the oil shocks of the 1970s, which were driven largely by embargoes, the current crisis involves direct damage to energy infrastructure. Facilities across the region, including in traditionally neutral countries, have become targets, raising concerns about how quickly lost capacity can be restored.

While history may not repeat itself, Yueh noted, it often “rhymes”. One key difference today is the reduced dominance of the Middle East in global oil production, alongside greater US output and the potential for longer-term structural shifts in energy supply.

In the short term, however, the outlook remains highly uncertain. Volatile prices and constrained supply pose a particular challenge for Europe, where economic growth was already weak.

Policy options are limited. Governments such as the UK can intervene domestically, for example by capping or subsidising household energy costs, but they have little control over global price dynamics. With fiscal and monetary tools constrained, much depends on how quickly the conflict can be resolved.

For now, Yueh suggests, Europe must brace for continued volatility in energy markets and the economic pressures that follow.

To listen to the interview on 20 May, click here