The Middle East energy crisis is increasing pressure on Europe’s gas and electricity markets. Prolonged disruption to LNG shipments through the Strait of Hormuz could drive sustained power price increases, reshape energy demand and accelerate the shift towards electrification.
Why a prolonged Hormuz disruption could keep European power prices high
The inability to secure a lasting peace agreement in the Middle East and restore maritime traffic through the Strait of Hormuz has prolonged uncertainty over global LNG supplies, triggering immediate volatility across European gas and electricity markets.
Any prolonged disruption to shipping routes could push gas prices sharply higher in the short term, create economic headwinds and directly affect wholesale electricity prices and baseload demand. Ultimately, these dynamics would lead to significant gas demand destruction.
Building on its May 2026 long-term outlook, Wood Mackenzie has developed two alternative scenarios assessing how the ongoing conflict could affect European electricity markets if hostilities continue and maritime flows remain constrained.
How the Middle East energy crisis could affect European gas and electricity markets
Europe’s gas market was already facing tight supply conditions before disruptions to LNG flows from the Middle East. The updated scenarios mainly differ from previous forecasts in the way consumers respond to a prolonged period of elevated gas prices.
The conclusion is straightforward: the longer the Strait of Hormuz remains closed, the higher gas prices are likely to climb, increasing the probability that electricity prices across Europe will remain elevated for years.
Two scenarios for the Middle East energy crisis
Under the Summer Settlement scenario, disruption to LNG shipments through the Strait of Hormuz would continue over the summer but be resolved before the season ends. Regional tensions would persist, although without further escalation. LNG exports would resume in September and gradually return to normal levels.
Gas prices would remain above previous expectations between 2026 and 2029, before converging with the baseline outlook by 2030. European electricity demand would broadly match the baseline scenario, as the relatively rapid resolution of the conflict would require only limited policy intervention and generate little additional electrification.
Compared with Wood Mackenzie’s original baseline forecast, this scenario would add approximately €13/MWh to electricity prices in 2027.
The Extended Disruption scenario assumes that shipping through the Strait of Hormuz is not fully restored until the end of 2026. In this case, the global LNG market would undergo a profound restructuring, with lower gas availability, greater demand destruction and much higher price volatility.
Economic recession expected in the second half of 2026
Under the Extended Disruption scenario, gas prices would not return to baseline levels until 2038.
A recession during the second half of 2026 would reduce baseload electricity demand, while the uptake of electric vehicles and heat pumps would accelerate as households and businesses increasingly switch away from fossil fuels to limit energy costs.
Although the recession would be relatively short-lived, with European GDP returning to pre-crisis levels in 2027, the economy would still forgo around €500 billion of GDP each year, weakening structural electricity demand.
Average European electricity prices would be around €45/MWh higher than the baseline throughout 2026 and 2027, before gradually easing from 2031 onwards, fundamentally reshaping electricity demand patterns.
Even under this severe scenario, however, wholesale electricity prices would remain below the peaks recorded following Russia’s invasion of Ukraine.
Middle East energy crisis and the outlook for European energy prices
A prolonged disruption to gas supplies would increase prices by around €50/MWh in the short term under the Summer Settlement scenario, while the Extended Disruption scenario would keep prices elevated until the mid-2030s.
The most significant impact on electricity prices would occur in 2026 and 2027. Persistently higher fuel costs, combined with weaker economic activity, would drive structural changes in electricity demand that would continue to influence prices well into the 2030s.
Italy and Ireland would likely face the largest increase in electricity prices under the Extended Disruption scenario because of their heavy reliance on imported natural gas.
During the first five years of the scenario, rising fuel costs would lift wholesale electricity prices across Europe by between €19/MWh and €33/MWh, depending on national market exposure.
Electricity prices beyond Europe
Since March, the Strait of Hormuz crisis has driven repeated spikes in LNG prices, increasing the cost of gas-fired power generation and pushing wholesale electricity prices higher in several regions beyond Europe.
According to the International Energy Agency (IEA), average wholesale electricity spot prices in the European Union and Japan rose by more than 30% year-on-year during the second quarter of 2026.
The United States, by contrast, experienced only limited exposure to the LNG price shock. Average wholesale electricity prices in the second quarter remained broadly unchanged from a year earlier.
In India, average electricity prices increased by less than 10%, reflecting the relatively limited role of LNG within the country’s energy mix.
Australia cuts electricity prices by 45% through renewables and battery storage
Australia followed a markedly different path.
Wholesale electricity prices were approximately 45% lower than a year earlier, as rapidly expanding renewable energy generation and battery storage capacity reduced dependence on gas-fired power plants during periods of peak electricity demand. The result highlights how greater deployment of clean energy and storage can improve resilience against international fuel price shocks.
