New Study by Mixon and Coauthors Evaluates Effects of Domestic Armed Conflicts on Residential Energy Markets in the EU

Geopolitical factors, such as political instability and domestic armed conflict, wield profound influence on the global energy landscape. The most recent onset of military conflict in Ukraine in 2022 triggered sharp declines in energy prices, given the countries’ status as major exporters of commodities vital for global food and energy security. The consequences of an energy supply shock due to armed conflict hinge on the conflict’s nature and scale, the geopolitical context, and the resilience of the affected nations’ energy infrastructure. A new study by Turner College economist Frank Mixon, Ján Buleca and Maryna Tatar of the Technical University of Košice, and Ermanno Affuso of the University of South Alabama evaluates the effects of external shocks, primarily domestic armed conflicts, on the market equilibrium in residential energy and assesses their impact on consumer welfare. 

Mixon and his coauthors conduct a consumer welfare analysis using a partial equilibrium displacement model that incorporates partial and total elasticities of supply and demand, as well as current market conditions, to assess the impact of external shocks on equilibrium prices and quantities. They investigate changes in consumer surplus within the European household energy market aggregate due to the energy supply shock triggered by armed conflicts. For the empirical portion of this study, the researchers employ publicly available data on real per-capita household final consumption expenditures and price indices for energy and other commodities (e.g., clothing, food, alcoholic beverages, housing, healthcare, transportation, communication, etc.) from the World Bank and Eurostat. They also collected the number of armed conflicts per country and year from the Uppsala Conflict Data Program and Peace Research Institute Oslo. These organizations define armed conflicts as disagreements between organized groups, or between one organized group and civilians, that cause at least 25 deaths during a year, including combatant and civilian deaths due to fighting.

Econometric results from analysis of 29 European Union member countries spanning from 1995 to 2021 indicate that that a one unit increase in the number of armed conflicts leads to a 0.143% increase in equilibrium price of residential energy. Additionally, the resultant decrease in aggregate consumer surplus at the sample’s average price and quantity is approximately 1 billion Euro (in 2015-Euro) per armed conflict. The study concludes by discussing policies and programs within the European Union, such as the European Fund for Strategic Investments (EFSI), the EU Cohesion Policy, and the Energy Performance of Buildings Directive (EPBD), that aim to enhance energy efficiency across significant projects including buildings and transportation. Given the study's results, the researchers suggest that EU policymakers explore additional measures that could facilitate energy deregulation and subsidize consumer investments in renewable energy technologies, potentially mitigating welfare losses stemming from undesirable energy supply shocks.