The global economy is facing a serious, but not unprecedented, energy crisis. The transportation of oil and natural gas has been negatively affected, mainly due to the closure of the Strait of Hormuz, while production facilities have also been hit, with possible long-term repercussions. The ongoing war in Ukraine is an additional aggravating factor.

Despite the pressure, the global economy is relatively resilient due to a decrease in dependence on oil production, as well as the availability of strategic oil reserves.

Nonetheless, a climate of uncertainty prevails as strategic oil reserves are being depleted internationally: the stock of strategic reserves, including both government-controlled and commercial reserves, rose to around 7.5 billion barrels before the crisis, of which 0.6 billion barrels have been used so far.

With an average drawdown of 0.2 billion barrels per month, the remaining reserves could, theoretically, last for another three years. However, without a return to normality, oil prices may increase with negative consequences, especially for countries dependent on imports of conventional forms of energy, including Cyprus.

Adverse side effects are already being reflected in rising energy and food prices, and the resulting decline in living standards, particularly for vulnerable groups.

The scope for fiscal response is limited, due to extensive interventions to address the pandemic and the war in Ukraine. Public debt is at high levels, with long-term government borrowing rates trending upwards, particularly in the US, UK and France.

Even countries with relatively low debt, such as Cyprus, have limited scope for fiscal stimulus, as they face long-term challenges of ensuring adequate pensions, accelerating the digital and energy transitions and strengthening security.

Also, the impact of unexpected, and hopefully short-term, challenges, including supporting the tourism sector in the wake of the war in Iran and sustaining the country’s meat industry amid the outbreak of foot-and-mouth disease, cannot be underestimated.

In the field of monetary policy, there are, on the one hand, indications of a peace agreement that will allow oil flows to resume and, on the other hand, the ECB raised interest rates for the first time in nearly three years on Thursday to prevent the risk of a resurgence of inflation.

Based on the above, policy options remain limited. The pressures to limit energy costs by reducing indirect taxes are understandable, due to administrative simplicity and immediate visible benefits. However, such an approach causes a fiscal burden, acts as a disincentive for the long-term necessary energy savings and green transition, while disproportionately benefiting higher income groups.

Direct support for vulnerable groups (low-income pensioners, long-term unemployed, new entrants to the private sector, recipients of public assistance) is considered more effective. Tax reduction policies are appropriate in cases of temporary crises and not for structural problems currently facing the energy sector.

At the same time, the energy crisis makes it imperative to upgrade the policy framework for the green transition, with an emphasis on the construction and transport sectors.

 Accelerated depreciation for energy-saving projects in existing buildings, the adoption of strict energy standards in new buildings, the upgrading of public transport and the continued encouragement of the purchase of electric cars are indicative examples of effective practices.