Europe’s lights haven’t gone out – but the pressure is on

By Claudine Fry, Partner, Geostrategic Advisory, Control Risks

The first thing to understand about the Middle East crisis and its impact on European business is this: the lights did not go out. But that is not reassurance – it is a warning.

The illusion of stability

What we witnessed across Europe this spring was a continent drawing down on reserves, improvising and innovating supply solutions, and absorbing shocks. Europe weathered an unprecedented oil supply shock without significant disruptions to supply. But its vulnerability to external shocks has been confirmed. And there will be a price to pay. 

Defining the situation: Europe’s shaky stasis 

The effects of conflict on global energy markets rarely all land immediately or obviously. The more dangerous dynamic, and the one I see companies consistently underweighting, is the indirect, time-delayed transmission of disruption.

Strategic reserves used to keep the lights on must now be restocked, at cost and at pace, ahead of winter. Energy costs – already a threat to productivity and consumer spending – could bite even harder in the months ahead. Supplies may be assured one way or another. 

But the Gulf is an uncertain bet as Iran-US tensions persist. Competition for access to alternate suppliers is intense. And the reliability of trading partners will be a constant source of uncertainty. 

The protracted Middle East conflict prompted Europe to deepen relationships with suppliers of energy outside the Gulf, easing immediate term pain but exposing the region to new vulnerabilities. These include the US and Russia, from whom the EU imported 5% and 25% more LNG year-on-year between March to May, according to the Institute for Energy Economics and Financial Analysis. 

Meanwhile, the impact of supply shocks on the availability and price of many manufactured goods and agriculture products takes time to filter through to consumers. Inflation linked to the Middle East conflict will not spike until later this year.

I was speaking recently with a major European retailer who revealed that the industry typically holds substantial backstocks of goods in the Middle East – a buffer against delays from Asian suppliers. That buffer is now largely inaccessible. With summer stocking for the winter retail season now underway, those gaps will start to materialise in coming months. The shelves will look fine… until they don’t.

Creative adaptation has its limits

European businesses have shown resilience. When jet fuel supply chains came under pressure, airlines restructured routes and alternative supply sources, including from the United States, moved to fill the gap. But the fixes are expensive, and the availability of supplies – including jet fuel, as well as helium, which plays a critical role in semiconductor manufacturing – around a third of which are sourced globally from Qatar, is a continuing concern.  

Costs are also being passed to consumers. A further intensification of cost of living pressures will increase frustration towards governments and potentially drive support for insurgent or emerging new political powers which offer a break from the past, but also raise the prospect of populist and controversial policy-making. 

Short-term adaptation is not the same as long-term resilience. The companies that are emerging strongest are the ones who anticipated the conflict, reacted fast and are learning the lessons of the last few months. 

Where Europe is most exposed

Businesses in Europe should ensure they have an accurate understanding of local and country-specific risk dynamics. 

• Germany stands out – as Europe’s industrial engine, its sensitivity to energy prices is structural, not incidental. Germany’s economic relationship with China adds a further layer of complexity: as geopolitical pressures reshape trade flows, the country faces a unique compounding squeeze.
• The UK presents a different but significant exposure profile given its reliance on imports. Without the continental grid connectivity that buffers some European neighbours, and carrying a higher cost base for energy already, the UK’s vulnerability to sustained disruption is acute.

These national exposures are symptoms of a wider structural problem: Europe’s dependence on external energy supply is now a strategic liability, and the crisis is adding urgency to the case for building resilience and competitiveness at a continental level.

For both economies, and for businesses operating across the continent, the question is no longer whether energy costs will rise, but how long the current phase of managed resilience can be sustained before structural adjustments become unavoidable.

So what does long-term business resilience look like?

I regularly advise multinationals on how to navigate this environment, and there are three things I consistently tell leadership teams.

1. First, plan ahead with a range of plausible and high-impact scenarios, and treat official forecasting about the economic impact of geopolitical events with caution when situations are fluid. The uncertainty being introduced by the Middle East conflict – compounded by US foreign policy unpredictability – is not a temporary deviation from normal. It is the condition..
2. Second, the companies that are faring best are those that moved early to lock in attractive commercial terms – on energy contracts, logistics, and supplier agreements – before the full weight of disruption landed. Effective management of geopolitical risk gives you first mover advantage. 
3. Third, and most importantly, the companies I worry about most are those that are optimising for current conditions without stress-testing against plausible futures. The Strait of Hormuz is the obvious chokepoint dominating headlines. But there are others. And the lesson of the past decade or so is that the crisis nobody was fully modelling – or thought was too extreme to be plausible – tends to be the one that arrives.

The operational reality

Europe is not insulated from prolonged closure and disruption in the Hormuz. It has been insulated so far. The difference between those two states is not a matter of luck – it is a matter of preparation, intelligence, and the willingness to make investment decisions under uncertainty rather than waiting for clarity that may never come.

The businesses that will navigate the coming period most successfully are those that are already diversifying their supply routes, reducing single-point dependencies, and building the strategic flexibility to absorb shocks when the next lag finally closes.

The lights are still on. The question every board should be asking now is: what happens when the back-up plans are derailed?