Maguire: Europe's next energy crisis is right in front of us.

The energy traders of Europe have been glued to Gulf maps for the past few weeks. The Rhine should be on their radar.

The renewed confrontation between Washington, D.C. and Tehran has driven oil prices up and re-ignited fears about the safety of shipping through the Strait of Hormuz. But another threat is emerging that is much closer to home.

The water levels in key inland shipping gauges, including Cologne and Kaub (on the Rhine) and Budapest on the Danube, have dropped to levels not seen since major drought years. This has forced barges and their cargoes to reduce the amount of cargo they carry and increased transport costs.

Low rivers are an inconvenience on their own. When combined with the rising geopolitical tensions of the Middle East they become more dangerous.

KEY TRADE ROUTES

The rivers of Europe are the secret arteries that run through its energy system. Fuel imported via Rotterdam and Amsterdam must still be transported inland to refineries and chemical plants, as well as industrial consumers.

Every ton of coal or diesel, gasoline, chemicals, biofuel, or other fuels that is not transported by barge requires additional vessels, higher rates, and longer delivery time.

While renewed U.S. Iran hostilities threaten oil flow through Hormuz once again and drive energy prices higher, Europe's shrinking waters risk turning a shock external supply into a broader internal logistic crisis.

The timing of this attack could not be worse.

The Rhine is Europe’s most important inland waterway for commercial shipping. German industry relies on it for transporting around 200 million tons per year, including fuels and raw industrial materials.

Water levels at Kaub, the most critical bottleneck on the river, have fallen to an exceptionally low level for July. This has forced vessels to sail partially loaded. Depending on the vessel type and route, some operators report freight reductions up to 80%.

The Danube also tells a story.

Budapest's water levels are now at lows that are more often associated with droughts in the late summer. Shipping companies report that vessels are operating at a fraction of their normal capacity. Freight surcharges have also risen as operators try to compensate for the reduced cargo volume.

Stress Test

The European energy system is increasingly dependent on flexibility in logistics.

After the Russian gas pipelines were shut down, Europe re-established its energy security by importing LNG, oil and alternative fuels via sea. Assuming that markets would be adequately supplied as long as cargoes can reach European ports was the assumption.

Ports are just the beginning.

The Rhine links Germany's industrial core with North Sea import terminals. River transport is vital for the transportation of coal for power plants, chemical feedstocks and petroleum products to inland consumers.

When river levels drop, cargo is shifted to rail and trucking systems that are already congested and expensive. It is not always a shortage. It is more often a dramatic rise in the cost of delivery that directly affects energy and industrial costs.

MOUNTING FEES

Economic damage is not a theoretical concept.

In previous Rhine droughts (notably in 2018), Germany suffered measurable industrial disruptions and losses of output.

This episode taught us that river levels are macroeconomic variables. When barges are not moving efficiently, industrial production, fuel distribution, and profitability all suffer.

Add the Middle East to your list.

The Strait of Hormuz is the world's largest oil transit chokepoint.

Oil prices have already risen due to attacks on ships, military strikes, and increasing threats. Concerns about tanker movement disruptions are also back. The increased risk of a total closure will increase insurance, freight, and commodity costs.

The interaction of these two risks poses a danger to Europe.

Oil prices are usually absorbed. Usually, temporary shipping disruptions can be managed. Low river levels are usually manageable.

When all three occur simultaneously, however, the system is significantly less resilient.

Due to Gulf tensions, European refiners could face higher crude costs. Meanwhile, distributors struggle with the inability to transport fuels into the country due to restricted barge traffic.

Chemical producers may face rising feedstock costs at the same time as logistics costs rise.

Utility companies may find that alternative fuels are readily available in ports, but are more difficult and expensive to transport to the places where they are required. Each problem reinforces each other.

The energy supply chain in Europe is beginning to look like a funnel.

RISK STACK INTERTWINED

Ironically, policymakers are increasingly separating climate change from geopolitics. They need separate solutions. Recent events indicate that they are increasingly intertwined.

Heatwaves and dry conditions are not only lowering Europe's river levels, but also increasing electricity demand. This puts pressure on the energy infrastructure.

Geopolitical conflict has also reduced the margin of error on global fuel markets. What appears to be a weather issue in Germany could quickly turn into an energy security issue across Europe.

It is important that traders pay attention to the river gauges in Kaub and Budapest, as well as to missile launches from the Gulf.

The other measures the risk of geopolitical conflict. One measures geopolitical risk.

?Europe's security of energy was shaped for decades by pipelines and tankers, as well as diplomacy. It may increasingly be shaped by rain.

As rivers shrink and conflicts increase, the continent learns an uncomfortable truth. Sometimes the most dangerous energy chokepoints are not halfway across the world but right in your backyard.

These are the opinions of the columnist, who is also an author. This column is great! Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn, X and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets 7 days a weeks.

(source: Reuters)