LONDON, March 16 (Reuters Breakingviews) - The surge in oil and gas prices that followed Russia’s invasion of Ukraine in 2022 taught policymakers two things. One is that spending money to lower people’s energy bills is better than a laissez-faire ​approach: euro area inflation would have been 1 to 2 percentage points higher otherwise, the International Monetary Fund (IMF) calculated, opens new tab. The other is that ‌these schemes cost an awful lot of money – around 540 billion euros, opens new tab for European Union members between late 2021 and mid-2023 – and are politically fraught to remove. With public finances now under strain, these lessons may prove mutually exclusive.

Policymakers are in the process of planning their responses to the energy shock brought about by the war in Iran. The European Union is now working on ​emergency measures to protect consumers and industries. Meanwhile, the United Kingdom is due to unveil a 50 million pound scheme to help around ​one million households in Northern Ireland with the surging cost of heating oil.

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Yet governments want to avoid a repeat of last ⁠time, with British Treasury chief Rachel Reeves saying that any future support package would be “more affordable” and focused on helping poorer consumers. According to Bruegel, most of ​the 2022-2023 support was offered in the form of untargeted policies, like cuts to fuel duty, price caps on energy and VAT reductions.

A common criticism of these ​measures is that, if a commodity becomes scarcer, prices need to go up to ration its use. IMF economists, opens new tab note that, had officials not distorted the true cost of European natural gas during the last shock, demand for it would have been 2% lower. They also estimated that targeted compensation for the bottom 40% of households would have been cheaper, costing EU nations ​1.7% of GDP on average rather than 2.4%.

Yet it wouldn’t have curbed broader inflation as much. Research shows that pricier energy is a key driver of households’ ​inflation expectations, opens new tab, which can lead to stronger pay demands, and that firms consistently pass these costs through, opens new tab to customers. This leads central banks to raise rates, which strains government coffers anyway. ‌Data from ⁠the International Energy Agency also shows electricity demand declined sharply after 2022, even in countries that engaged in strong price suppression, like Italy and the Netherlands.

It’s still preferable to tailor such policies based on income and energy usage. But this poses a logistical challenge for countries with insufficient or fragmented data. In Germany, for instance, confidentiality laws have historically prevented data sharing across government departments.

And no one knows better than Reeves that targeting can be a contentious task. In 2024, she ​restricted Winter Fuel Payments, which help pensioners ​cover home heating costs, to those ⁠on means-tested benefits. Following public backlash, she later restored the payments for millions of people.

Finance ministers are hoping the Middle Eastern conflict is short lived and can be addressed with moderate intervention. If that fails to materialise, though, they may face ​an impossible balancing act.

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Context News

• As of 1000 GMT on March 16, European benchmark gas prices ​traded at 51.8 euros ⁠per megawatt-hour, compared with 32.5 euros since the conflict in the Middle East began. Brent oil prices have jumped to $104.8 a barrel from $72.5.
• European Union energy ministers are due to meet on March 16 to discuss options for curbing the surge in oil and gas prices triggered by the Iran war. Some member states, including Italy, favour a ⁠sweeping EU ​intervention, such as a suspension of the bloc’s carbon market. This could curb the influence of ​large gas-fired power plants on power prices. An EU diplomat told Reuters that Brussels is more likely to focus on national tax cuts or domestic subsidies.
• South Korea, which relies almost totally on imports for ​its energy, started capping gasoline prices on March 13.

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Editing by Jon Sindreu; Production by Oliver Taslic

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Jennifer Johnson

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Jennifer Johnson is a London-based columnist for Breakingviews, where she covers the telecoms, media and retail sectors. She was previously a reporter for the Investors’ Chronicle and she holds a master’s degree in financial journalism from City, University of London.

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