Risks for the EU and Cyprus from a prolonged closure of the Strait of Hormuz: a possible scenario of a global energy shock

The Strait of Hormuz has once again found itself at the center of global economic and political attention. Escalating tensions in the Persian Gulf, strikes on military infrastructure and mutual accusations between the United States and Iran are quickly being reflected in oil quotations. The market is reacting almost instantly: Brent has risen to levels around $95–$98 per barrel, reinforcing the sense that the situation is moving beyond a local conflict.

But the main question is not short-term volatility. Much more important is another scenario — what will happen if the issue is not weeks of instability, but months or even years of restricted shipping through the Strait of Hormuz. Such a scenario, although not considered the baseline, is increasingly being discussed by analysts as an «extremely negative scenario with systemic consequences».

For the European Union, this would mean not just another round of inflation. It would be a structural energy shock, comparable to the crises of the 1970s, capable of changing the operating model of the European economy. For Cyprus, which is entirely dependent on imported fuel and external energy, the consequences would be even more direct and tangible.

The importance of the Strait of Hormuz for the global economy

The Strait of Hormuz is a narrow passage through which a significant share of global energy trade flows. Millions of barrels of oil and huge volumes of liquefied natural gas are transported through it every day. In practical terms, this means that a significant part of the global energy system depends on a single geographic chokepoint.

The importance of the strait is determined not only by the volumes of supply, but also by the structure of global trade. The Gulf states — Saudi Arabia, Iraq, Kuwait, the UAE and Qatar — use this route as their main export channel. Qatar's role is especially critical, as it depends almost entirely on Hormuz for LNG exports.

Even if Europe does not import a significant share of oil directly from the region, the global market is structured in such a way that a reduction in supply at one chokepoint leads to higher prices for all participants. This makes the European Union and other import-dependent economies vulnerable to events taking place far beyond their own region.

An additional risk factor is the limited availability of alternative routes. Although the UAE and Saudi Arabia are developing bypass pipelines, their capacity is not sufficient to fully compensate for a potential loss of Hormuz, especially in the short term.

Possible crisis scenarios

If we look at how the situation could develop, several levels of risk can be identified, each affecting the global economy differently.

In the short-term scenario, with shipping restricted for several weeks, the market would react primarily with a price shock. Oil could quickly move into the $120–$140 per barrel range. In this case, the economy would face accelerating inflation and rising fuel, logistics and electricity costs. However, systemic consequences would remain limited, and once supplies are restored, the market would stabilize relatively quickly.

A completely different situation arises with a prolonged partial closure of the strait, which could last until the end of 2026. In such a scenario, this would no longer be a temporary shock but a new reality for the energy market. Oil prices could settle in the $150–$200 range, while the LNG market would face a supply shortage. This would inevitably lead governments to introduce elements of energy consumption rationing, and industry would come under pressure from sharply rising costs.

For Europe, this means entering a recessionary phase. Industrial production declines, especially in energy-intensive sectors, unemployment rises, and pressure on budgets increases. According to analysts' estimates, such a shock could reduce euro area GDP by several percentage points, and the global economy — by several trillion dollars in cumulative losses.

If the crisis drags on for years, into 2027 and beyond, the situation becomes qualitatively different. This is no longer about a crisis in the classical sense, but about a transformation of the global economic model. Cheap energy ceases to be a basic prerequisite for globalization. Production chains begin to break apart and be reconfigured, trade becomes more regionalized, and industry gradually shifts to regions with more accessible resources. This is no longer a crisis in the classical sense, but a structural restructuring of the global economy.

The European Union's vulnerability

The European Union would enter this potential crisis in a weakened state. After the 2022 energy shock, Europe had already faced a sharp rise in the cost of gas and electricity, as well as the need to urgently reconfigure energy supplies.

In effect, Europe has become much more dependent on the global liquefied natural gas market. This means that any disruptions in supply from key regions, including Qatar, are immediately reflected in prices within the EU. In a Hormuz crisis, competition for LNG intensifies, and Europe is forced to compete with Asia, where demand is also rising.

The most vulnerable are energy-intensive industries. The chemical industry, metallurgy, fertilizer production and automotive manufacturing are sensitive to energy costs and may partially lose competitiveness. Under such conditions, the process of relocating production outside Europe accelerates, primarily to the United States, where energy costs remain lower.

Inflation becomes another channel of pressure. Rising oil prices quickly spread through the entire economy: transport, logistics, food and electricity become more expensive. Inflation could once again reach high levels, creating additional pressure on household incomes and government budgets.

Specific risks for Cyprus

Cyprus, in this scenario, is among the most vulnerable economies in Europe. This is due not to the size of the economy, but to its structure.

The Cypriot economy is almost entirely dependent on imported energy resources. The island has no domestic oil refining and no significant internal energy sources, and a substantial share of electricity is produced using imported fuel. This makes the country extremely sensitive to any rise in global oil prices.

The second key factor is dependence on tourism. The tourism sector accounts for a significant share of GDP, and its resilience depends directly on the cost of air travel and the overall purchasing power of European consumers.

If oil prices rise to $120–$140, gasoline in Cyprus could become more expensive, reaching around 2 euros per liter and above. In a harsher scenario, with oil at $150–$200, prices could move into the 2.5–$3 per liter range. In the case of a prolonged crisis, even elements of administrative regulation and temporary restrictions are possible.

Economic consequences for Cyprus

Rising fuel prices quickly spread throughout the island's economy. More expensive transport and logistics lead to higher prices for food, imported goods and utilities. As a result, inflation may return to high levels comparable to crisis periods.

In such conditions, the tourism sector faces double pressure. On the one hand, air travel costs rise; on the other, overall demand falls among European households whose real incomes are shrinking. This could lead to a noticeable decline in tourist flows and hotel revenues.

Cyprus's economic growth in such a scenario either slows sharply or moves into stagnation. In a prolonged crisis, a recession is even possible, especially if external shocks coincide with a domestic contraction in demand.

How prepared is the European Union?

After the 2022 crisis, the European Union took a number of steps to improve energy resilience. Strategic reserves were increased, LNG import infrastructure was expanded, and the development of renewable energy sources was accelerated.

However, these measures do not eliminate structural problems. Europe still depends on energy imports, while production costs remain high. The debt burden of governments also limits the ability to mount a large-scale crisis response.

Cyprus in this context remains even more vulnerable due to limited energy infrastructure and the absence of significant backup capacity.

Possible transformation of the EU economy

If the crisis proves prolonged, Europe may face a profound transformation of its economic model. The role of the state in regulating energy markets will grow, budget deficits will increase, and industrial policy will become more protectionist.

At the same time, the development of alternative energy — nuclear, renewable and hydrogen — will accelerate. However, this process takes time and cannot fully offset the short-term losses from an energy shock.

As a result, Europe may enter a prolonged period of lower growth and structural restructuring of industry.

A prolonged disruption of the Strait of Hormuz is one of the most serious geo-economic risks of our time. Unlike local crises, it affects the very foundation of the global energy system and could trigger a chain reaction at every level of the global economy.

For the European Union, this means the risk of recession, deindustrialization and prolonged inflation. For Cyprus — a direct blow to the cost of living, energy and a key sector of the economy — tourism.

Even if the crisis is later resolved, the consequences will not disappear immediately. The world has already begun adapting to a new reality in which energy security is no longer a backdrop, but a central factor in economic development.