What are the impacts of energy crises and how can they be avoided?
An ‘energy crisis’ can occur when energy becomes scarce, unaffordable, or both. At the global level, these crises are typically driven by a tightening of supply, and sometimes by surging demand, or a mix of the two – linked to factors such as economic conditions, geopolitical events or natural disasters. Because energy is a crucial input for other sectors, when its prices surge upwards, so does the cost of everything else. Furthermore, because fossil-fuel markets are global, significant disruption in one location can lead to higher prices worldwide. Energy crises are thus rarely confined to the energy sector itself.
Most global energy crises originate as supply shocks: sudden, external disruptions that the market has no time to absorb. The two oil crises of the 1970s, and the impacts on energy supply of Russia’s 2020s war with Ukraine and the 2026 blockade by Iran of the Strait of Hormuz, all fit this pattern and expose the vulnerability of the fossil-fuel-dependent energy system.
What are the short-term impacts of energy crises?
When oil or gas suddenly becomes scarce, prices rise sharply in ‘downstream’ sectors: for oil, this means transport fuels and petrochemicals; for gas, heating, electricity generation and energy-intensive industry. Energy feeds directly into consumer prices, but there are also indirect effects as higher energy costs raise the price of manufactured goods, food and transport. Firms either absorb the hit or pass it on; often they do a combination of both. Government policies, to an extent, can cushion firms and consumers against these impacts, but they cannot divert them completely.
For households, the burden falls hardest on those with low incomes, who spend a higher share of their earnings on energy and food than those who are better off, leaving little buffer when energy prices drive these costs higher.
For industry, energy-intensive sectors including chemicals, steel and fertiliser production face surging input costs that can force cuts in output, with consequences that ripple across the economy.
The impact on individual countries varies according to whether they are net exporters or importers of fossil fuel energy. Net exporters might see their revenues surge and fiscal positions strengthen. Net importers bear the full brunt: energy import bills soar, trade balances deteriorate, and currencies come under pressure. Since three-quarters of the world lives in fossil-importing states, the damage from such shocks is widespread.
In the most acute cases, physical shortages and rationing might follow. During the 1973 oil crisis, long fuel queues became a common sight in the United States and Europe. In the 2026 Strait of Hormuz crisis, where blockades are restricting the transportation of significant quantities of oil and liquefied natural gas (LNG), at least 60 countries have introduced emergency measures in response.
What methods do governments use to try to lessen the short-term impacts on households and businesses?
Governments may put in place demand- or supply-side measures. Demand-side measures are designed to reduce energy consumption by improving energy efficiency or conserving energy. Supply-side alternatives that are readily deployable in the short term are relatively limited. Examples include releasing stored fossil fuel reserves where they exist and increasing decentralised renewable energy capacity. Some countries temporarily extend or reactivate their coal-fired power capacity.
Governments can also act to protect consumers and businesses from the full impact of rising energy prices. Countries with better market access and larger fiscal buffers can absorb a larger share of the shock, while others have little choice but to let it weigh on economic activity. Universal price-suppressing policies entail elevated fiscal costs and carry well-documented drawbacks, including a dampening of price signals that would otherwise encourage a reduction in energy demand, and a large share of the financial support not reaching those who need it most. It is recommended that these policies be targeted at specific groups and be temporary. Examples include energy price caps, emergency cash transfers for vulnerable households and support for acutely exposed firms.
Figure 1 provides examples of measures and instruments that can help ease near-term impacts. Further measures that are part of the transition to clean energy, shown in the box, take longer to implement or take effect because they require structural changes, such as in infrastructure or technologies, but are critical to reducing vulnerability to future energy price shocks.
Figure 1. Examples of measures to protect households and businesses from oil price shocks and shortages
Source: Authors, based on information from the IEA, IRENA and IMF
What are the medium- to long-term economic impacts of energy crises?
If a crisis persists, short-term pain becomes structural economic damage. This damage can occur through several different transmission channels: persistent inflation erodes wages and consumer spending; investment collapses in energy-intensive sectors as uncertainty makes capital expenditure risky; and governments, under pressure to shield households from the impacts, run up fiscal deficits that can constrain public investment later. The alternative of allowing prices to rise unchecked carries its own risks, as inflation spills over into the wider economy.
A clear historical example remains the aftermath of the 1973 embargo enacted by the Organisation of Petroleum Exporting Countries (OPEC) against the United States and Israel-supporting countries, banning petroleum exports to those countries and cutting oil production. Stagflation – simultaneous stagnation of economic activity and inflation – gripped major Western economies and proved stubbornly resistant to conventional policy tools. Economic growth stalled and unemployment rose.
The damage from crises like the 1973 embargo is felt unevenly across income groups and economies. Poorer households, developing economies and countries without domestic energy resources suffer the most, with lasting consequences for growth, development and poverty reduction. The 1970s shocks triggered a debt crisis across developing countries, and in 2022 the diversion of LNG to Europe caused power outages in Bangladesh and Pakistan. At the time of writing, the 2026 Strait of Hormuz crisis is threatening food security and poverty levels through the surge in energy prices and the disruption to fertiliser transportation.
These crises have also accelerated structural change to energy systems. The 1970s oil crises drove investment in nuclear power, energy efficiency and North Sea oilfield development. The 2022 Ukraine crisis accelerated policy support for and investment in renewables in Europe. Importantly, the quality of alternatives available has evolved over time: where the 1970s substitutes were slower and more expensive, solar, wind and electrification are now much more attractive than the fossil fuels they replace.
How can moving away from fossil fuels help reduce the frequency and impact of energy crises?
Transitioning towards a diversified clean energy mix is critical to tackling the vulnerabilities of fossil fuel systems – on top of the benefits for the climate. Clean energy systems offer distinct security and economic advantages. Unlike fossil fuels, whose production is geographically concentrated, clean energy is widely available – and once deployed, cannot be embargoed, strengthening domestic energy independence. Further, renewable energy prices have fallen, making these resources now highly competitive with fossil-fuel electricity generation, whose price remains volatile and exposed to geopolitical risk. Countries that have managed to decrease the influence of fossil fuels in their wholesale electricity prices through increased clean energy and battery deployment and reduced fossil fuel imports (such as Spain) have been less exposed to the 2026 energy price shock.
The energy transition is thus as much a security and economic agenda as a climate one. Achieving it requires substantial investment across energy efficiency, generation, storage, electrification and grid modernisation. This investment should be seen as an opportunity to strengthen economic growth and resilience. Transitioning to clean energy can reduce import costs, shield economies from price volatility, create new sources of industrial development and growth, and mitigate environmental and health costs. In the short term, targeted and temporary interventions can cushion the blow of energy crises; in the long term, the structural transformation of energy systems is needed to reduce exposure to future shocks.
This Explainer was written by Delfina Godfrid and Maria João Pimenta with review by Daisy Jameson and editing by Georgina Kyriacou.