The European energy crisis is worsening with the approach of winter and Japanese reassurances regarding economic policies

The European energy crisis is entering a more sensitive phase as winter approaches, after the European Union has incurred more than 100 billion euros ($113.5 billion) additional on energy imports since the outbreak of the Iranian war, without an increase in imported quantities. At their meeting in Dublin, energy ministers discussed ways to contain prices, secure supplies and provide alternatives to fossil fuels, amid fears of a diesel shortage, and moves to review the date for implementing new methane rules.

These pressures come at a time when fuel prices are rising in some European countries by about 50 percent, while gas storage levels have become lower than usual for this time of year due to high prices and supply disruptions associated with the closure of the Strait of Hormuz, through which in peacetime about 20 percent of the oil and liquefied natural gas traded globally passed.

European Energy Commissioner Dan Jorgensen said, during a meeting of energy ministers of the 27 EU countries in Dublin, that “times are difficult,” explaining that the bloc’s countries spent an additional 100 billion euros this year on energy, “without obtaining a single additional molecule of gas or oil.” He called on member states to continue filling gas stocks to a level of no less than 80 percent, and to take temporary and specific measures to reduce the impact of rising prices, in addition to working to reduce demand for gas and electricity.

In return, countries are looking to accelerate the transition from fossil fuels to electricity and expand the infrastructure of electrical networks, thus reducing dependence on imports that are vulnerable to geopolitical shocks.

Diesel is at the top of concerns

Diesel is emerging as one of the biggest concerns as Europe enters the winter season. The Executive Director of the International Energy Agency, Fatih Birol, said that Europe is one of the regions most exposed to diesel risks. Due to its heavy dependence on imports, he pointed out that about half of diesel supplies come directly from the United States.

Birol said that the International Energy Agency is closely monitoring the markets for petroleum products, especially diesel, and that member states may discuss releasing more strategic oil reserves if market conditions require it.

He added that the agency is conducting close consultations with European governments and countries exporting diesel and petroleum products, at a time when markets are increasingly sensitive to any potential shortage in supplies.

This comes after US President Donald Trump threatened to restrict diesel exports. This raised concerns in European markets, although US Energy Secretary Chris Wright later expressed doubts about the feasibility of a broad ban on exports. European officials said that they do not currently expect a 90-day US ban to be imposed, but they are preparing for a scenario of continued high prices.

Flexibility in methane bases

In parallel with dealing with supply pressures, Brussels is moving to give oil and gas importers more time to comply with European methane rules, in response to concerns about security of supply.

The move comes in response to pressure from France, along with about a dozen other European countries, which fear that the new rules will narrow the base of gas suppliers at a time when markets are suffering from scarcity of supplies and high prices. Some countries, including Italy and the Czech Republic, want a longer postponement of up to three years.

The United States, the largest supplier of liquefied natural gas to Europe, has also warned that the rules may hinder fuel flows to the European market.

Those supporting the postponement say that granting importers additional time will allow them to conclude supply contracts for next winter without legal risks associated with the new rules, while various studies indicate different estimates of the ability of current gas imports to meet methane requirements.

Jorgensen said that he asked the Commission to study postponing the import-related part of the rules scheduled to take effect on January 1, 2027, explaining that the possible postponement may extend for one year, but it will not mean easing the ambitions of the environmental rules.

Under the rules, foreign oil and gas producers supplying to the EU must monitor, report and verify methane emissions, with tougher requirements on the emissions intensity of imports to begin later. Non-compliant companies face fines that can reach 20 percent of their annual revenue, according to the rules.

Switching to electricity

In the longer term, the price and supply crisis is pushing Brussels to accelerate the reduction of dependence on imported fossil fuels, expand the use of domestically produced electricity and strengthen its networks. Jorgensen said Europe needed to replace domestic energy sources with imported fossil fuels, which he described as “polluting and expensive.”

The current pressures reveal the sensitivity of energy security in the bloc, which has reduced its dependence on Russian supplies since the Russian invasion of Ukraine in 2022, but in return has increased its dependence on direct imports from the United States. As winter approaches, governments are faced with two parallel paths: securing fuel in the short term, and reducing exposure to global energy market shocks in the longer term.

In this context, the Hormuz crisis rearranges European policy priorities, between containing the cost of imports, ensuring the flow of fuel, and pursuing emissions reduction goals. The discussion of postponing methane rules comes within this framework. Some governments are seeking to give importers more time to comply with the new requirements, amid fears that the rules will affect supply options during a period of tight supplies.

The Japanese government sought to dispel the fears of markets and Washington about the possibility of Tokyo returning to broad fiscal and monetary stimulus policies, after Finance Minister Satsuki Katayama confirmed to her American counterpart, Scott Besent, that Prime Minister Sanae Takaichi is not adopting a “resuscitation” approach, at a time when Japan is facing great pressure from inflation, high bond yields, and a weak yen.

Katayama said on Tuesday that she made clear during a phone call with the US Treasury Secretary last week that Takaichi's approaches cannot be classified as policies that support inflation through fiscal and monetary expansion.

She added: “I explained that Prime Minister Takaichi is not a supporter of recovery policies. As she has repeatedly explained on various occasions recently, I indicated that this is something that she herself has confirmed.

The Minister of Finance confirmed that she will continue her close contacts with the US Treasury Department, and will work with Washington to ensure orderly movements in the currency markets, in reference to the great sensitivity surrounding the yen exchange rate and Japanese economic policies.

Katayama's statements reflect the Takaichi administration's efforts to change the prevailing impression in the markets that the Prime Minister is inclined towards policies that were associated with the "Abenomics" program, which was launched by the late Prime Minister Shinzo Abe and relied on strong monetary easing and flexible fiscal spending to support growth and end deflation.

Takaichi describes her financial policy as “responsible and proactive,” but investors are treating her economic agenda with caution, especially in light of government spending plans, the proposal to temporarily reduce the sales tax on food, and her relationships with economic advisors whose names were previously associated with “Abenomics” policies.

Katayama's position came after similar statements from Economy Minister Minoru Kiyoshi, who has been viewed for some time as close to the pro-economic revival trend, due to his previous reservations about raising interest rates and his connections to a group of lawmakers who support expansionary spending.

Kiuchi said last week that the phase of “Abenomics”-style recovery policies, based on monetary easing and flexible fiscal spending, has ended, in a message that reinforces the government’s efforts to show that it does not aim to reproduce previous economic policies in an environment in which the problem of inflation has become more urgent.

These statements gain additional importance after Besant pointed out that Japan's priority should be combating inflation rather than stimulating growth. His remarks reflected American concern about the persistence of some elements of “Abenomics” within Takaichi’s policies and among a number of its allies and advisors.

The discussions come at a time when Japan's economic environment is undergoing a clear transformation. After many years of facing deflation and weak demand, the authorities are dealing with persistent inflation, pressure on the currency and a sharp rise in government bond yields, coinciding with the Bank of Japan normalizing its monetary policy.

Markets have become more sensitive to any sign of additional fiscal expansion, as increased government spending could enhance inflationary pressures and lead investors to expect higher interest rates, which is directly reflected in the bond market.

Indeed, on Tuesday, the yield on 10-year Japanese government bonds remained near the highest level in 30 years, while bets increased on the possibility of the Bank of Japan raising interest rates again before the end of the year.

The yen also remains a major focus in the economic dialogue between Tokyo and Washington. The weak Japanese currency raises the cost of imports, especially energy, and adds to domestic inflation, while the authorities seek to avoid sharp or disorderly movements in the exchange market.

Successive messages from Katayama and Kiyoshi reveal that the Takaichi government is trying to draw clear boundaries between its current policy and the “Abenomics” era, while at the same time keeping room for growth-supporting spending. The challenge for Tokyo will remain to reconcile its “proactive” financial agenda with the need to control inflation and maintain the confidence of bond and currency markets.