A prolonged energy price shock is looming for the European Union after Iran incapacitated a key natural gas facility in Qatar, raising the possibility of supply shortages lasting for years. During a summit in Brussels on Thursday, EU leaders expressed alarm over the deteriorating economic outlook and called for an end to attacks on energy infrastructure amid the conflict involving the US, Israel, and Iran. Italian Prime Minister Giorgia Meloni was notably impassioned, warning that the energy situation is extremely grave. Dutch Prime Minister Mark Rutte stated that if assaults on energy assets do not cease, "the global impact will or could become very serious."

These concerns are well-founded. On Thursday, natural gas prices surged to a three-year high. The European Central Bank indicated that sustained supply disruptions could drive eurozone inflation to 6.3% and trigger a brief recession. According to the European Commission, price increases over the past two weeks have added 7 billion euros (approximately 8.1 billion USD) to Europe's energy costs. This bleak outlook arrives at an inopportune time, as the continent is just beginning to address sluggish growth and complex relations with both the US and China. All these plans hinge on reducing Europe's energy prices, which were already multiples of those of competitors even before the price shock induced by the Iran conflict.

Thursday's events serve as a stark reminder of the continent's vulnerability to global markets and the EU's limited tools for immediate action. Eurogroup President Kyriakos Pierrakakis told reporters before joining the EU leaders' meeting, "This is absolutely a worrying situation. We are certainly discussing all scenarios, both good and bad."

The latest surge in energy prices stems from an Iranian missile strike on Qatar's Ras Laffan industrial zone, which caused extensive damage to the world's largest liquefied natural gas (LNG) plant. Saad al-Kaabi, CEO of QatarEnergy, reported that two facilities responsible for 17% of the nation's LNG exports (approximately 13 million tonnes annually) were affected, with repairs expected to take three to five years. French President Emmanuel Macron stated on Thursday that if production capacity itself is damaged, the war will have more profound consequences.

Deepening concern was also evident within the EU's Oil Coordination Group, comprised of member state representatives. Since the onset of attacks by the US and Israel on Iran, officials had maintained that the Middle East crisis would impact prices but not threaten supply. On Thursday, the group acknowledged for the first time that this assessment might soon need revision. A meeting briefing noted that "in the event of a prolonged disruption of energy flows through the Strait of Hormuz, the EU's oil supply security would need to be re-evaluated," adding that supplies of diesel and jet fuel are being closely monitored due to the EU's higher dependency in these areas.

At the summit, leaders instructed the executive body to urgently propose targeted, temporary measures to address the spike in fossil fuel import prices. However, the anticipated options come with drawbacks. Member states could opt to cut electricity taxes, but this could deal a significant fiscal blow to countries already grappling with high deficits. Ten EU nations, including Italy and Poland, suggested relaxing the bloc's Emissions Trading System (ETS) to ease the burden on industry. Yet, this would sacrifice significant revenue and undermine incentives for investing in renewables, which officials view as the long-term solution for lowering energy prices. Spanish Prime Minister Pedro Sánchez emphasized, "Europe must commit to domestic energy. That is not oil or gas, but the sun and wind."

In their concluding remarks, leaders pressured the Commission to propose a broader review of the ETS by July. The system imposes pollution limits on approximately 10,000 facilities owned by power plants and manufacturers. German Chancellor M Merz clarified, "We are not questioning the ETS. These are merely adjustments; fundamentally, it is not a radical change."

Meanwhile, economic warnings are growing louder as the critical Strait of Hormuz is nearly shut down due to Iranian threats, upending global supply chains. A key question is how long the conflict will last and how quickly this vital passage can reopen once it ends.

The World Trade Organization warned on Thursday that if the war keeps energy prices elevated for an extended period, global merchandise trade flows face a deeper slowdown. Under such a scenario, the goods trade forecast for 2026 would be reduced by 0.5 percentage points, and the services trade outlook would decline by 0.7 percentage points. Earlier, EU Economics Commissioner Valdis Dombrovskis told member state finance ministers that a prolonged energy price surge could cut 2026 economic growth by up to 0.4 percentage points—a significant reduction from the previously forecasted 1.4% growth.

Speaking in Frankfurt on Thursday, European Central Bank President Christine Lagarde cautioned governments against excessive economic intervention at this time. She stated, "Any fiscal response to the energy price shock should be temporary, targeted, and tailored."