Fuel relief ends as oil hits $97

Germany, Spain and Italy will all let fuel subsidies expire within days of each other at the end of June. Together they make up more than 40% of eurozone GDP, so this is not a marginal adjustment. It comes while 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 risen to 3.2% (Eurostat).

For Malta, as for every eurozone country, this is domestic policy decided partly elsewhere. Prices are rising while the economy barely moves, the classic stagflation squeeze. On Wednesday, the ECB, the European Central Bank that sets borrowing costs for the 20 eurozone countries, is almost certain to raise rates again. Markets put the probability at 91%.

The real cost of oil at $97

The $97 Brent benchmark does not capture what European refineries actually pay once oil has been moved, insured and delivered. The Strait of Hormuz, the narrow waterway between Iran and Oman that carries roughly 20% of the world's oil, has been disrupted for 100 days. Ships are now going around Africa's Cape of Good Hope, adding 10 to 14 days at sea.

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

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

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

Three countries, one week, no coordination

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

There is no EU mechanism that coordinates these expiries. The fiscal flexibility extended by the Commission on 3 June, up to 0.3% of GDP a year, covers structural energy investments such as renewables and grid upgrades. It does not cover fuel tax cuts.

That leaves governments in a tight loop. Removing subsidies raises prices immediately. Higher prices strengthen the case for more ECB tightening. Higher rates then feed back into mortgages, business loans and public borrowing, including in small economies where households feel the change quickly.

Who bears the weight

Wednesday's expected hike will raise the ECB deposit rate to 2.25%. This is the interest rate the central bank pays on overnight deposits, and it acts as the anchor for borrowing costs across the eurozone. The problem is that one rate serves 20 very different economies.

German inflation is running at 2.7%. In Greece, it reached 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%.

Purchasing power is being eaten away where it is hardest to absorb. In Italy, wages rose 2.1% while prices rose 2.9%. Workers are earning more on paper but buying less 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.

Gas storage must nearly double in less than five months, with the refilling window closing in October. Bundesbank president Joachim Nagel put the position plainly on 5 June: "Even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains."

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