The oil crisis in the Middle East is ongoing, and in the meantime optimists had already begun to hope that with a ceasefire, the Strait of Hormuz would reopen, gas and oil would start flowing again like rivers, and everything would resolve itself as if by magic.

By now it should be clear that nothing will be resolved by magic, and in reality we do not know when the armada of tankers that has accumulated in one of the world's biggest maritime bottlenecks will start moving again. The reality is that in current physical transactions, oil costs $150 per barrel, and the full price increase has not yet reached our gas stations.

How will this affect the global economy, Europe, and Estonia—and is there anything we can do to mitigate these effects?

History may not repeat itself

If we look back at the oil crises of the 1970s, which also originated in the same region, the 1973 oil crisis resulted in European inflation tripling. Based on today's figures, that would push inflation in Europe to around six percent this year.

Whether history will repeat itself in full is unclear, and it may not. At the same time, it must be acknowledged that the targeted two‑percent inflation rate in Europe will very likely remain a dream. Why?

Europe's biggest problem is that we import energy rather than export it, unlike the United States. As a result, we cannot influence global market prices—we are price takers, not price setters—which means we have to pay whatever the global market charges us.

The first effect has already reached us in the form of higher fuel prices. Rising fuel prices quickly feed into the transport sector, and all goods and services in which transport plays any role add these costs to their pricing. Ultimately, this means that consumers end up paying for everything at the checkout.

An artificially created shortage also means that, in addition to higher prices, there is a physical lack of supply—in other words, there simply is no fuel. Several airlines have announced that they will reduce the number of flights in the coming months, as there is not enough fuel to keep all aircraft flying. Shortages, in turn, drive prices even higher.

Along with oil, natural gas production and the transportation of liquefied natural gas (LNG) have also come under pressure. Europe relies on natural gas for about 20 percent of its electricity generation. Qatar's gas fields were heavily hit by Iranian missile strikes, and restoring gas production to previous levels will therefore take time—and not a little.

In addition, large volumes of LNG are stuck in the Hormuz bottleneck. Qatar produces about 20 percent of the world's LNG, and an estimated 20 percent of that output has been taken offline due to missile attacks. LNG production and transport infrastructure is complex, and restoring it takes two to three years.

To understand what these figures mean: a loss of 20 percent corresponds to roughly 16 million tons of LNG. That amounts to about 14 percent of the European Union's annual consumption, depending on the year. The loss of such a quantity causes a price shock in the market. In Europe, gas prices in futures markets have already risen by nearly 80 percent. Asia has already been hit—gas deliveries to China have fallen by 40 percent. Asia is much more dependent on Middle Eastern oil and gas than Europe.

So this is not something short‑term or quickly passing. The impact of rising oil and gas prices in Europe is already being felt, reaching us primarily through more expensive imported services and goods. The direct impact will be felt in the fall, when the heating season begins. In Estonia, an estimated 10 percent of electricity is generated from natural gas, and about 15 percent of heating depends on gas. As a small consolation, our Latvian neighbors are significantly more dependent on gas—around 30 percent for electricity and nearly 50 percent for heating.

Economic and psychological factors

As marketing shows and TV game shows like to say: that's not all. In addition to energy and transport, the oil crisis will affect our economy through rising food prices.

Food will become more expensive because we import both finished food products and raw materials. Transport costs have gone up, but an even greater impact on both domestic and foreign food industries comes from more expensive fertilizers. Agricultural output becomes more expensive because nothing is produced without fertilizers anymore. Key fertilizers are made from natural gas, which is now scarcer and more expensive than before.

These are effects that stem directly from our dependence on imports—we have to buy all of the aforementioned goods from abroad.

There are also other economic and psychological factors. First, all the media attention surrounding the Middle East crisis also highlights its economic impact. People develop inflation expectations (they assume prices will rise anyway), while consumer sentiment becomes more pessimistic. This shift is already visible in March data.

We can stand on our heads in opinion columns and talk about how great everything is, but when a person looks at fuel prices at the gas station, it doesn't matter what the newspapers say. Rising inflation expectations make any price increase easier to justify with the argument that "everything has gotten more expensive anyway"—which is not untrue. As a result, even those who do not yet need to raise prices immediately will do so.

Forecasters at the Ministry of Finance point out that abolishing the so‑called tax wedge has increased people's real purchasing power by 10 percent, which means prices will also start rising if demand exists.

Higher prices, in turn, lead employees to demand higher wages—and if this does not happen immediately, it will happen at the beginning of next year. Thus, the inflationary impulse carries over into the following year. The public sector is setting the pace in the wage race, with labor costs rising by more than nine percent this year. The private sector will be forced to follow.

In the longer term, rising oil prices will also influence central bank monetary policy. The European Central Bank has raised its inflation forecast for the euro area this year to 2.8 percent, up from 1.9 percent previously. This upward revision is very unlikely to be the last. If prices grow faster than the desired two percent, the ECB will begin raising interest rates.

The debate is no longer about whether interest rates will rise, but rather when. Most likely, we will see the next rate hike already at the end of this month, when the ECB Governing Council meets again in Frankfurt on April 30. After that, it becomes a matter of belief—whether rates are raised twice more and six‑month Euribor reaches 2.85 percent by the end of the year, or whether increases are steeper and Euribor ends the year at around 3.1 percent.

Higher interest rates will start to slow construction activity and real estate development. Loan payments will increase, and consumption will fall. Overall, the economy will begin to contract.

Can the government do anything?

Can the government do anything? Certainly. The government cannot influence interest rates—that is decided in Frankfurt. But it can mitigate price increases.

When Finance Minister Jürgen Ligi says that abolishing the tax wedge helps lower‑income people cope with rising prices, that is not true, because it was higher‑income earners, not poorer ones, who benefited most. In effect, we are compensating wealthier people for price increases, not poorer ones.

For lower‑income households, food makes up a much larger share of total consumption, and rising food prices hit them hardest. Neighboring countries are lowering VAT on food and fuel excise duties to make things easier for people. Meanwhile, we stand like a steadfast tin soldier defending the basic principles of the free market.

From the finance minister's speeches and writings, the idea shines through that we should not interfere with how the market functions—the market will regulate itself. Very interesting. When it comes to wind farms, however, it is apparently perfectly acceptable to pay producers compensation if prices fall too low. I looked at my electricity bills: in March, the price of the electricity consumed accounted for 40 percent of the bill, while the remaining 60 percent was taxes. Why don't we talk about the free market here? Our commitment to market economics seems rather selective.

Is the government interested in curbing inflation? Paradoxically, no. If inflation is high—and personally I believe the ECB crisis scenario of six percent is still realistic—tax revenues also increase, reducing the budget deficit. Expenditures grow as well, but past practice has shown that tax revenues grow faster. That's one less headache for the government.

Even if we see the end of the Hormuz bottleneck in the coming weeks or months, why would we assume that oil producers and exporters (including the U.S.) would immediately rush to reduce shortages and lower prices? For them, it's a pure windfall if oil prices remain around $110–120 for another year. Money would simply pour into their coffers. After all, everything can always be blamed on the war with Iran.

The only argument for why the U.S. would want oil prices to fall is rising domestic fuel prices and the looming congressional midterm elections. Americans are not happy when gas prices go up. Still, I fear that the toothpaste squeezed out of the tube by the Middle East crisis will not be put back in.

In short, there are quite a few reasons why a quick end to the oil shortage should not be expected anytime soon. We had better start getting used to higher prices at the pump—and not just there.