The US President Donald Trump sent a threatening message on Easter Sunday to Iran, demanding that Iran must open Strait of Hormuz the 6th of April (today), failing which the US intends to obliterate Iran’s energy infrastructure. The expletive call from President Trump follows weeks of increasing oil prices across the world, harming energy supply and overall economic stability. The Strait of Hormuz is after all the chokepoint through which 20% of the world’s oil supply passes through. Experts have noted that the current disruption to oil supply is worse than that of the 1973 OPEC Oil crisis. What began as a military confrontation has now escalated to an economic war where collateral damage is the highest, with the functionality of the Strait of Hormuz is one of the key determinants to regain normalcy. How the back-and-forth threats by US and Iran to each other can be productive is a question that will remain going forward, to ease pressure on global energy prices.
What is at stake to completely reopen the Strait of Hormuz?
Since the February 28th military attacks on Iran until the Strait of Hormuz (SOH) has been largely closed or severely restricted. This undoubtedly is impacting oil mobilisation therein affecting the supply. Monopolizing on the ultimatums US gives outs coupled with the importance of SOH, Iran has maintained selective, permission-based transit regime since early March. Essentially ships are approved to pass through the SOH on a case-by-case basis after communicating with extensive detail on the vessel ownership to the IRGC in advance. This unequivocally converts the SOH into a geopolitical tool of Iran who will continue to monopolize on the current geopolitical situation, exacerbated by Trump’s ultimatums and threats, while providing leverage to Iran’s allies such as China, Pakistan, India or Russia. Recently, Philippines secured access through the SOH. The ongoing trend shows that any country that is willing to side with Iran and show allegiance is likely to benefit by being given access through SOH, thereby securing oil supply and reducing impact on their local economy. It is likely that Iran continues on the status quo persists and takes control over who gets what and when relating to oil; more specifically isolating western-aligned shipping and rewarding allies.
This does begs the question as to how long Iran can keep up with the threats of US without obliterating their economy. Afterall US has a greater air force capacity than Iran, whose air force equipment are relatively less developed. Iran’s greatest strength regardless of infrastructure shortcoming li in their unconventional warfare methods such as cheap drones and sea mines and in part their geography. Both of these factors taken together makes it harder for the US or others to acquire SOH militarily. This, however, is not perpetual. As of now the US has destroyed most of the Iranian vessels, therefore the ability to enforce a blockade is shrinking due to depletion of physical assets. The next is the economic factor, which is the revenue streams to Iran which is already constrained due to sanctions. If oil exports of Iran (90% of total oil exports) through the Kharg Island is blocked, that would mean a recession level impact on the Iranian economy. All in all, the re-opening of the SOH appears to be contingent on significant resource depletion on the part of Iran and an economic downturn in the US with rising oil prices.
What could the continued rise in global energy prices mean for economies moving forward?
So far, we have seen Brent Crude oil price per barrel exceeding USD 100 and even reaching USD 126. If this selective closure persists, the situation can cloud economic progress and even create the perfect storm for recessions in countries like US and their allies. One way this is already impacting are fertiliser prices and availability as Urea prices have increased by 50% since the start of the war. This snowballs to overall increase in agriculture inputs with LNG disruption affecting planting season in the Northern hemisphere. This will undoubtably impact food prices towards latter part of 2026 and well into 2027. The macroeconomic impact will take flight through high inflation rates which will seep through into interest rates and markets in the long term. This can materialise to some extent regardless of the war ending, however, the recovery of this can be contingent on how soon the war ends. This is likely the greatest impact aside from energy disruption to the world. Secondary impacts include the cost to aviation by extension cargo and tourism. Surging jet fuel costs and closed Iranian and Iraqi airspaces has forced longer reroutes thereby increasing cost for the traveller and the airline therein. While this might not be a long-term impact, it is nonetheless a short-term impact that is causing disruption to countries that are determinant on imports, tourism and other sectors reliant on air travel.
All this points to a likelihood of economic downturns in certain countries. Already the International Energy Agency (IEA) chief has warned that April’s oil supply loss will be double that of March, as pre-war shipments dry up completely. Having already lost 12 million barrels per day the IEA head described this as the largest energy disruption in history, with rationing, inflation and growth slowdowns in emerging economies likely imminent. In the US, recession probability has surged across Wall Street, with Moody’s AI model sitting at 49%, while Goldman Sachs stands at 30% and EY Parthenon at 40%. The Federal Reserve is caught between cutting rates, risking inflation, or hiking. It is evident by now that the war does have a broad based impact from food to aviation to energy which can cumulate to an overall economic recession possibility. The recovery capacity will likely be determined on structural factors of economies such as fiscal stability coupled with structural enablers or barriers in relevant sectors.
How will Sri Lanka be impacted from this?
We are living through the impacts of interrupted oil supply, with rising oil prices to power outages. High cost air travel and shipping can largely impact tourism and exports. However, there are several mechanisms by which Sri Lanka reduces the dire impacts of this. First are the large fiscal buffers from tax revenue – they can act as a sponge to absorb some of the negative impacts of rising prices until and when the geopolitical tension eases. But it does not take away a complete impact of the war. Especially where remittances and tourism are a central source of revenue and foreign exchange to the country.
Second is the potential opportunity Sri Lanka’s Colombo port and even Hambantota port can be as a central point to trade routes instead of a purely transhipment route. This has a possibility given the efforts to expand the capacity via public and private partnerships. There has not been any materialisation of this in a large scale, but it is a possibility, nonetheless.