Fuel Relief Ends With Oil at $97

At the end of June, three of the eurozone's big engines will take support away from motorists almost at once. Germany, Spain and Italy, which together make up more than 40% of eurozone GDP, are letting fuel subsidies lapse within days of each other.

In calmer times, that would be a manageable fiscal tightening. These are not calmer times. Oil is above $97 a barrel after renewed Iranian-Israeli strikes (Al Jazeera), eurozone growth has slowed to 0.1% (Eurostat, CNBC), and inflation has climbed to 3.2% (Eurostat). Prices are rising while the economy barely moves. That is the awkward territory Europe is now entering.

On Wednesday, the ECB, the European Central Bank that sets borrowing costs for the 20 eurozone countries, is expected to raise rates again. Markets put the probability at 91%.

The real cost of oil at $97

The Brent price does not capture what European refineries are actually paying. The Strait of Hormuz, the narrow waterway between Iran and Oman carrying roughly 20% of the world's oil, has been disrupted for 100 days. Ships are going the long way around Africa's Cape of Good Hope, adding 10-14 days at sea.

War-risk insurance premiums have jumped by more than 2,000% since February. By the time crude reaches European ports, the delivered cost is well above the headline $97.

The Institut Jacques Delors calculates that the EU has spent an extra €46 billion on fossil fuel imports since late February. Relief measures across 23 member states added another €16 billion, bringing the total economic bill to roughly €60 billion.

Gas is the deeper worry. EU storage is at 40.8% of capacity, against a mandatory 80% target by November 1 (AGSI+). The Netherlands, northern Europe's main gas hub, is at just 16.1%. Iranian strikes on Qatar's Ras Laffan complex knocked out 17% of Qatari LNG production for an estimated 3-5 years. That supply will not be back before winter.

Three countries, one week, no coordination

Germany's fuel tax cut of about 17 cents per litre expires on June 30. Petrol currently averages €1.92 and will rise to roughly €2.09 overnight. Spain's fuel VAT reduction from 21% to 10% ends the same day; without a renewal, petrol rises by about 29 cents per litre. Italy has already halved its diesel subsidy on June 6, pushing diesel above €2.00.

There is no EU mechanism to co-ordinate these expiries. The fiscal flexibility extended by the Commission on June 3, worth up to 0.3% of GDP annually, applies only to structural energy investment such as renewables and grid upgrades. It excludes fuel tax cuts.

That leaves governments in a bad loop. Ending subsidies lifts prices immediately. Higher prices strengthen the case for ECB rate rises. Higher rates then tighten the squeeze on households already paying more for fuel, food and mortgages.

Who bears the weight

Wednesday's expected move would lift the ECB deposit rate, the rate paid on banks' overnight deposits and the anchor for wider borrowing costs, to 2.25%. The problem is familiar in the eurozone: a single interest rate lands on very different economies.

German inflation is running at 2.7%. In Greece, it hit 5.4% in April, with energy prices up 20.2% year on year. Bulgaria, the EU's most energy-intensive economy, uses three times the eurozone average energy per unit of GDP. Its inflation reached 7.0%.

The loss of purchasing power is showing up where it is hardest to absorb. In Italy, wages rose 2.1% while prices climbed 2.9%. Workers are earning more in cash terms and still falling behind each month.

Rabobank projects that Dutch petrol could reach €2.82 per litre by late summer if crude keeps climbing. The same forecast expects winter gas prices to peak at €76 per megawatt hour, roughly double current levels.

The calendar is now doing some of the policy work. Gas storage has to nearly double in under five months, with the refilling window closing in October. Bundesbank president Joachim Nagel put it plainly on June 5: "Even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains."

The subsidies expire regardless. Winter is five months away, and Europe's main gas buffer is half-empty.