War in the Middle East: implications for European energy and industrial policy

Six weeks after the United States and Israel launched airstrikes against Iran, leading to further regional escalation and the closure of the Strait of Hormuz, Europe finds itself grappling with a crisis that it did not start. The strait is the conduit for 20% of the world’s oil and gas supplies, which are directed almost entirely to Asian markets. At the same time, the global nature of energy and commodity markets means Europe is also experiencing significant collateral economic impacts.

The immediate consequences for Europe have not been physical shortages, but tighter global markets, rising shipping insurance costs and uncertainty over how long elevated prices may persist. Experts expect that the impacts of this war will be felt for some time to come, even if the attacks stop within the next few weeks.

For Europe, this is above all a price shock rather than a supply crisis, but one that can have serious consequences for households and industry by increasing costs and fuelling inflation. Facing these complications, countries across the world have already started implementing energy conservation measures, and European Commissioner for Energy and Housing Dan Jørgensen has urged countries to prepare for a prolonged disruption of international energy trade.

The lesson is both familiar and uncomfortable. Europe remains deeply vulnerable to turmoil far beyond its borders because it still relies too heavily on fossil fuels it does not control.

Three broader lessons emerge from the current crisis.

The European Union is facing the second energy shock of the current decade, and the current crisis inevitably invites comparisons with the energy crisis that followed Russia’s full-scale invasion of Ukraine. While that crisis accelerated the deployment of renewables and efforts to reduce import dependency, Europe’s import dependency currently remains at 57%, costing the Union EUR13bn in the first 28 days of the current crisis.

First, member states are entering this crisis under markedly different economic conditions. While many governments were able to deploy significant state aid to cushion price shocks in 2022, some may no longer have the same fiscal room for manoeuvre.

One policy instrument deserving renewed consideration is the taxation of windfall profits earned by fossil fuel companies. Taxing part of those profits would not solve the crisis on its own, but it could give governments extra room to support households and businesses under pressure. The measure generated EUR28bn during the last crisis and could again prove a helpful tool if targeted towards vulnerable households.

Second, the crisis has reignited debates over industrial competitiveness and Europe’s manufacturing base. In the current situation, there is a risk that the upcoming review of the Emissions Trading System (ETS) Directive will become an opportunity to blame carbon pricing for the situation Europe finds itself in, even though it currently accounts for about 10% of electricity bills.

On the contrary, it is important to stress that the Green Deal, and the climate agenda more broadly, are Europe’s strongest long-term protection against future energy crises. Had Europe maintained the same deployment rate of heat pumps and renewables seen between 2022 and 2023, it would have been in a much better position today. Data from the International Energy Agency show that between 2021 and 2023, the deployment of renewable energy saved more than EUR100bn in fossil fuel imports. With oil prices skyrocketing, it is important to highlight the benefits of accelerating decarbonisation, maintaining predictable policy frameworks and creating dedicated investment plans that can transform climate targets into action.

Third, Europe needs a more strategic, ambitious and forward-looking industrial policy. The continent’s industrial difficulties cannot be explained by energy prices or climate rules alone, but by a wider squeeze that includes global trade tensions and stronger competition from China in high-value sectors. To maintain international competitiveness and drive long-term growth, Europe should stop trying to do everything at once, choose the industries that matter most – especially in cleantech and energy-intensive sectors – and back them properly. This is particularly important in light of instruments such as the Industrial Accelerator Act. Given the political climate, if the EU wants to preserve carbon pricing and its broader climate framework, it must also offer industry credible incentives to invest and develop transition plans.

Europe cannot afford to treat this latest energy shock as just another emergency to be managed until prices settle. The closure of the Strait of Hormuz has once again exposed how costly import dependence can be, and how quickly geopolitical turmoil can spill into European homes, factories and politics.

The answer is not to retreat from the energy transition, but to accelerate it: reducing dependence on imported fossil fuels, protecting the most vulnerable households and giving industry the confidence to invest. Europe’s energy security, industrial competitiveness and climate ambitions can no longer be treated as separate agendas – they have become one and the same.

Related content:

• Insight | Regime change in the Middle East: here we go again by Jamie Shea, Senior Fellow for Peace, Security and Defence at Friends of Europe (March 2026)
• Policy Insight | Iran in Focus: charting a path for the future by Friends of Europe, taking place on 2 April 2026
• Publication |War in Iran: from an energy shock, to an electrification one? by Phuc-Vinh Nguyen, Head of the Energy Centre, Institut Jacques Delors (March 2026)