€100 million: the cost for Malta to offset war-driven energy price surge

The government is expecting to pay out between €80 million and €100 million to cushion the blow from the energy price hikes brought about by the war in the Middle East, according to Clyde Caruana.

“As things stand, we’re projecting that’s how deep we’ll need to dig into our war chest by the end of the year,” the finance minister told Times of Malta.

The additional bill will cover the rising costs of fuel and electricity coming from the interconnector and LNG supplies.

Although this is a significant blow to the country’s finances, it still leaves quite a bit of wiggle room in a war chest that Caruana said was worth €250 million.

Shortly after the Iran war hit, he told parliament that this is how much Malta has set aside to absorb price shocks over and above the existing subsidies.

As the war tears through the Middle East, oil and gas prices are surging, and concerns grow over the impact that rising energy prices could have on consumers and the economy.

Brent crude prices have repeatedly broken past $100 per barrel, and LNG prices have seen even more dramatic spikes following Iranian strikes on a major Qatar gas complex last month.

While petrol prices are hedged until the end of 2026, Malta has no such protection for diesel. This leaves the war chest exposed to market volatility.

We might even perform better than I had projected in October’s budget- Clyde Caruana

But despite the massive extra expenditure, the minister said he remains confident he will hit, or even exceed, the deficit reduction targets he set in the last budget.

The economy is growing fast enough to generate the tax revenue needed to cover the bill, and the tax department is increasingly collecting more of what it is owed, and that puts the country in a relatively comfortable financial standing, he argued.

“As things stand, I’m optimistic that the extra spend will not impact our deficit targets, and we might even perform better than I had projected in October’s budget,” he said.

During the last budget, he pledged to bring the deficit down to within the EU-approved threshold of 3% by this year.

Caruana is also betting that the energy crisis will not derail his fiscal targets as the multi-million dollar fuel bill is almost entirely offset by a one-off expense that has now dropped off the books.

Last year’s deficit was weighed down by €73 million in compensation set aside for National Bank shareholders. With that baggage, the government still reached its deficit targets, and he expects the same to happen this year, with a similar energy cushion bill.

This essentially means that by and large, the impact of the deficit this year will be roughly equivalent to last year’s, he explained.

A critical fuel corridor

The Iran war, sparked by the US-Israel attack, has disrupted what is arguably the world’s most critical fuel corridor. Iran closed the Strait of Hormuz last month – a narrow waterway through which a fifth of the world’s oil and a massive portion of LNG are transported.

To make matters worse, Iranian drone strikes hit two of Qatar’s main LNG facilities last month. Although Malta does not get its gas from that part of the world, the strain on the entire global supply is impacting prices nonetheless.

Meanwhile, for the few ships willing to navigate the region, insurance premiums have surged, adding millions to the cost of every voyage.

Malta currently spends €150 million a year on subsidies. In 2022, when the world was hit by the outbreak of the Russia-Ukraine conflict, the country spent €350 million on subsidies.