Adolf Junior
The latest market reports put Brent crude at approximately US$117 per barrel, following renewed attacks and concerns about Middle Eastern supply disruptions.
Let’s take a look as to how this would impact Sri Lanka.
Sri Lanka’s external-sector data show that the average crude import price was only US$73.20 per barrel in 2025. Using that value as the reference point, and assuming the import volumes and the relationship between crude and refined-product prices remain unchanged, to import the same volume at a Brent crude price of US$120/bbl, the corresponding new annual bill would be an estimated US$6.56bn, thus indicating an additional annual cost of US$2.56bn. This works out to a massive increase of 64%.
In LKR terms, it’s even worse. In 2025, the total oil bill was about LKR 1,240 billion at Rs.310 per US$. In 2026, it would amount to about LKR 2,165 at Rs.330 per US$: a staggering 75% increase.
This simple estimation illustrates the scale of the risk. Let’s now break it down further, and examine as to what this would mean for foreign-exchange liquidity. The Central Bank’s reported fuel import expenditure of US$4 billion in the first eight months of 2026 is already a serious warning signal. On that basis, 3 fundamental questions arise:
- Can the country now meet its fuel-import payments without drawing down reserves excessively or accumulating arrears?
- Will the additional dollar demand lead to greater depreciation pressure on the rupee?
- How much of the cost could be passed through to consumers, and how much will have to be absorbed by public enterprises, the Treasury and businesses?
This sustained oil-price shock would therefore create a serious problem even if the Government manages to secure sufficient fuel supplies, particularly since the financial cost of securing those supplies may itself undermine economic stability due to several reasons:
a) Higher diesel and petrol prices will increase bus and freight costs. Food prices will rise even without a domestic food shortage because transporting produce becomes more expensive.
b) Higher fuel costs will raise thermal electricity generation costs and affect energy-intensive businesses, while the ultimate impact will depend on the electricity generation mix and tariff adjustments.
c) Higher freight and operating costs will reduce exporters’ margins. More expensive aviation fuel will also raise travel costs, while geopolitical uncertainty can discourage visitors.
d) Higher transport, food and utility bills will reduce disposable income. Lower-income households will be particularly vulnerable because energy and food account for a substantial share of their spending.
Whether acknowledged or not, an oil price of US$120 will become much more dangerous when it coincides with declining usable reserves, weaker foreign-exchange earnings and a loss of market confidence. This oil price shock must NOT be considered in isolation, as it is arriving while Sri Lanka is attempting to rebuild its external resilience.
Unfortunately, none in the government or the Central Bank seem to appreciate as to how rapidly Sri Lanka’s weak external-sector figures would change in this scenario, and understand as to how rapidly the situation could change in the next few days and weeks.
