America has struck Iranian oil tankers, Iran is threatening US energy interests and shipping through Hormuz has plunged. For Sri Lanka, a distant war is getting uncomfortably close to the fuel bill.
The confrontation between the United States and Iran has entered another dangerous phase, with attacks moving increasingly onto oil tankers, shipping routes and energy infrastructure across the Gulf.
The United States struck three Iranian oil tankers over the weekend after Iran’s Revolutionary Guard fired ballistic missiles at an American aircraft carrier and guided-missile destroyer. Iran subsequently said it had attacked tankers using what it described as an unauthorised route through the Strait of Hormuz and vessels it alleged were connected to the United States.
Iranian Parliament Speaker Mohammad Baqer Qalibaf has now warned that further American attacks will receive a faster and more severe response, explicitly pointing to US-linked oil and gas interests across the region as potential targets. Tehran also announced on Monday that it intends to establish a new restricted zone in the Persian Gulf and issue revised shipping corridors through the Strait of Hormuz.
The escalation matters because the Strait is not simply another piece of contested water. Hormuz is one of the world’s most important energy arteries and disruption there immediately affects the availability and price of oil far beyond the Middle East.
Shipping is already being severely affected. Reuters reported on Monday that commodity-vessel movements through Hormuz have fallen to around 10 ships a day over the past 10 days, the lowest level since May, as operators confront the risk of sending vessels through an increasingly militarised waterway.
The United States says its forces have redirected dozens of commercial vessels while enforcing its maritime blockade against Iran. Iran, meanwhile, continues to impose its own restrictions on shipping through Hormuz, leaving commercial operators attempting to navigate between two competing systems backed by military force.
The result is increasingly visible in the oil market. Brent crude was trading around $97 a barrel on Monday, approaching the psychologically important $100 level and near a six-week high as markets priced in the possibility of further disruption to Gulf supplies.
That makes this a Sri Lankan economic story as much as an international one.
Sri Lanka imports virtually all the petroleum it consumes. A sustained increase in crude and refined-product prices eventually works its way through electricity generation, transport, aviation, fishing, manufacturing and the cost of moving almost everything sold in the country.
There is another danger developing below the headline crude price. Reuters reports that supplies of fuel oil used by ships and some power plants are tightening sharply as refinery disruption and the Iran conflict affect production and tanker movements.
Asia is particularly exposed because of its dependence on Gulf supplies. Fuel-oil inventories at major international hubs are reported to be about 30 per cent below normal seasonal levels, while the price of very-low-sulphur fuel oil in Singapore has risen sharply since the Iran conflict began.
More expensive bunker fuel means more expensive shipping, and for an island economy dependent upon ships for imports and exports that eventually becomes another inflationary pressure.
The Gulf states are also finding themselves increasingly drawn into a confrontation many of them have spent years trying to avoid.
The United Arab Emirates has publicly rejected Iran’s proposal for a new restricted zone around Hormuz, arguing that no single country should determine access to an international waterway. Iranian attacks and threats against energy and military infrastructure elsewhere in the Gulf have further increased pressure on governments which had previously attempted to maintain workable relations with both Washington and Tehran.
There are still diplomatic channels. Washington continues to indicate that a negotiated settlement remains possible, while regional states including Qatar and Oman have previously attempted to mediate between the two sides.
But diplomacy is now operating alongside missiles, tanker attacks, blockades and threats against energy infrastructure. Every additional exchange makes miscalculation easier and compromise politically more difficult.
Sri Lanka cannot influence the military confrontation, but it can prepare for its economic consequences. The immediate questions for Colombo concern petroleum stocks, alternative suppliers, exposure to Gulf shipping disruption and the amount of additional foreign exchange required if oil remains around $100 or moves substantially above it.
The Government should also be watching freight rates and marine insurance rather than crude prices alone. An oil shipment that remains physically available can still become considerably more expensive when the vessel carrying it must navigate a conflict zone.
The danger is not necessarily that Hormuz closes completely. A prolonged period in which ships continue moving but in dramatically reduced numbers, at greater risk and higher insurance and freight costs, can inflict substantial economic damage without the Strait ever formally shutting.
For Sri Lanka, that distinction matters.
The country has spent painful years rebuilding foreign-exchange reserves and stabilising an economy which collapsed partly because it could no longer finance essential imports. Another large external energy shock is therefore precisely the sort of event economic policy must anticipate rather than merely react to.
The fighting may be thousands of kilometres away, but the transmission mechanism is remarkably short: Hormuz to the oil market, the oil market to Sri Lanka’s import bill, and the import bill eventually to the household.
Be that as it may, wars do not have to reach Sri Lanka’s shores to reach Sri Lanka’s pocket.
