By The Pulseline News Desk
Sri Lanka could face a fresh economic shock as international oil prices surge towards US$ 110 a barrel, threatening to increase fuel costs, transport expenses and inflation at a time when households and businesses are still recovering from the country’s worst economic crisis in decades.
Brent crude futures climbed as high as US$ 109.97 a barrel on Friday (11), their highest level since May, after rising more than 6% on Thursday (10). U.S. West Texas Intermediate crude also remained above US$ 100 a barrel. Both benchmarks are up nearly 13% for the week, marking their sharpest weekly increase since July.
The rally has been driven by escalating conflict in the Middle East and mounting concerns over disruptions to oil shipments through the Strait of Hormuz, one of the world’s most important energy corridors.
The situation has also raised concerns over the Red Sea shipping route following intensified attacks in the region, increasing fears that disruptions could spread across multiple routes used to transport crude and other commodities.
For Sri Lanka, which depends heavily on imported petroleum products, a sustained rise in global crude prices could quickly translate into higher import costs and renewed pressure on the country’s external finances.
Fuel prices emerge as a key risk
Sri Lanka’s fuel pricing mechanism means global oil prices and exchange-rate movements remain important factors in determining domestic prices.
A prolonged period of crude prices above US$ 100 a barrel could therefore make it increasingly difficult to maintain lower domestic fuel prices without passing at least part of the increase on to consumers.
Higher petrol and diesel prices would have effects far beyond filling stations.
Transport operators could face higher operating costs, while the increased cost of moving goods could feed into food prices and the prices of other essential commodities.
For a country where a large share of household income is already absorbed by essential expenditure, another increase in the cost of living could put renewed pressure on household budgets.
Inflation threat returns
The timing of the oil shock is particularly significant for Sri Lanka.
Domestic inflation has already been accelerating, with headline inflation reaching 8% in August from 7.3% in July. Food inflation also increased sharply to 8.5%.
A sustained increase in petroleum prices could add another layer of pressure by raising transportation, electricity generation and production costs across the economy.
The impact would be particularly significant if higher fuel costs feed into food distribution, agricultural production and fisheries, sectors that rely heavily on fuel for transportation and operations.
This could create a difficult policy environment for the Government and the Central Bank, which have been attempting to preserve the gains made in stabilising the economy following the 2022 crisis.
Pressure on the external sector
Higher oil prices would also mean Sri Lanka has to spend more foreign exchange on energy imports.
This comes as the country continues to rebuild its foreign-exchange reserves and strengthen its external position.
Sri Lanka’s gross official reserves reached around US$ 6.6 billion in July, while the Government has set its sights on increasing reserves further. At the same time, the country remains vulnerable to external shocks, particularly because of its dependence on imported fuel.
Every sustained increase in the international price of crude therefore creates an additional foreign-exchange requirement.
If oil prices remain elevated for several months, the additional import bill could complicate efforts to build reserves and strengthen the balance of payments.
Test for the recovery
The latest oil shock also highlights one of the vulnerabilities of Sri Lanka’s post-crisis recovery: the economy may have stabilised, but it remains highly exposed to developments beyond its borders.
The Government is relying on stronger tourism earnings, worker remittances, exports and foreign investment to build the country’s foreign-exchange position. But a sharp increase in the petroleum import bill could absorb part of those gains.
There could also be a secondary impact on businesses, particularly energy-intensive industries, transport companies, manufacturers and small enterprises.
For consumers, the consequences could be felt through higher bus and transport costs, more expensive goods and services and renewed pressure on food prices.
Government faces a delicate balancing act
The immediate challenge will be determining how much of the international oil price increase should be reflected in domestic fuel prices and how much can be absorbed without undermining the country’s fiscal and external position.
Keeping fuel prices artificially low could provide short-term relief to consumers but risk creating pressure on public finances or the balance of payments. Passing the full increase to consumers, meanwhile, could accelerate inflation and increase the cost of living.
Sri Lanka’s recent economic crisis demonstrated how quickly shortages of foreign exchange and energy can spread through the wider economy.
The current situation is different — the country has rebuilt reserves, restored access to international financing and made progress under the IMF programme — but the latest oil price surge is a reminder that the recovery remains vulnerable to external shocks.
If the Middle East conflict continues and crude prices remain around or above US$ 100 a barrel, Sri Lanka may once again have to navigate the difficult trade-off between protecting consumers, containing inflation and safeguarding scarce foreign exchange.
For an economy still rebuilding its buffers, the longer the oil shock lasts, the greater the challenge.
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