Albania and the energy and economic challenges from the impact of tensions in the Strait of Hormuz

Developments in the Strait of Hormuz, one of the most critical nodes of global energy supply, constitute a direct risk for small and open economies such as Albania.

Although the country does not import oil directly from Iran, it is fully integrated into the global energy price system.

Albania does not have the power to influence the global price and acts as a price taker, absorbing the prices formed in international markets. Around one fifth of global oil transits through this corridor, and any uncertainty, even without a physical supply interruption, is immediately reflected in international markets. Futures contract prices rise due to expectations of supply shortages, and this increase often does not reflect a real shortage, but a perception of risk.

For Albania, any price increase is quickly transmitted to the CIF prices of imports, increasing transportation costs and insurance premiums for ships bringing goods. These costs translate almost automatically into the retail price of fuels.

In a small and open economy, energy is a transversal input, and any increase in fuel prices quickly extends to other sectors of the economy, creating immediate inflationary pressure.

Transmission channel into the economy

Energy shocks are not absorbed neutrally by the Albanian economy.

Four structural characteristics make the transmission fast and often amplified.

First, Albania has a high dependence on imports, not only for energy but also for basic foods and production inputs. Any fluctuations in international prices translate directly into supply costs for domestic businesses. Second, Albanian markets are concentrated, especially in strategic sectors such as fuels and wholesale distribution of goods, which makes cost transmission faster and more complete. Third, the high level of informality creates space for margin increases beyond the real cost, especially in situations of uncertainty. Fourth, there is low competitive elasticity in distribution, where supply chains are short and inflexible, and alternatives are limited.

The transmission process works clearly: first, the fuel price increases in the domestic market, then the cost of transport for goods and services rises, then the cost of food and industrial products increases, and finally the increase is absorbed by the consumer through higher prices.

The effect is fast because energy is an input in almost every economic activity, and thus the shock does not remain isolated in the fuel sector but spreads throughout the price system in a very short period.

Experience from inflation during the Ukraine war

The crisis caused by the war in Ukraine serves as a clear precedent for how Albanian markets react to energy and geopolitical shocks.

The external shock was only the starting point. The internal market structure, with its concentration, informality, and rapid reaction to expectations, amplified the effect beyond the international impact.

After the outbreak of the conflict, international energy and food prices increased significantly, and this was immediately transmitted to the domestic market for fuels, edible oils, grains, and basic consumer products.

The high level of informality and limited transparency in price formation created space for expansion of trade margins beyond the real cost.

Another component was market speculation, where operators increased prices before the actual arrival of goods with new costs and resold existing stock at new prices. This generated a self-reinforcing inflationary spiral.

Structural market asymmetry

Beyond the classic cost transmission mechanism, the experience of recent years has highlighted a persistent feature of the Albanian market, namely the asymmetry in the transmission of import prices.

When international prices rise, the response in the domestic market is immediate and almost complete. Economic operators justify the increase with higher supply, transport, and insurance costs, immediately reflecting it in the final consumer price.

Conversely, when international prices fall, the transmission process is significantly slower and often partial. The decrease is justified with arguments such as “risk reserve,” recovery of previous losses, or uncertainty about the stability of the trend in markets.

In practice, this means that increases are transmitted quickly, decreases are partially absorbed, and the difference often remains in the form of an additional margin.

In crisis cycles, this asymmetry is accompanied by an expansion of trade margins. In the absence of strong competition and full transparency in supply chains, increases are easily justified, while decreases face resistance.

In a new tension scenario in the Strait of Hormuz, where energy price increases would be immediate in international markets, there is a risk that this trend will return with high intensity. The initial imported effect can turn into a more sustained wave of price increases, not only due to the real cost but because of the structural way the domestic market reacts to external shocks.

This turns the issue from a cyclical problem into a long-term institutional and competitive challenge.

Sectoral impact

Energy shocks of geopolitical origin are not distributed equally in the economy. They first affect sectors with high energy intensity and then spread through transport costs and imported inputs.

Fuels are the first point of impact. Any increase in the international price is immediately reflected and creates a chain effect in urban and interurban transport, logistics services, and sectors such as agriculture and construction, which use fuel intensively for machinery and material transport. This sector is the main multiplier of initial inflationary pressure.

Food is affected on two levels, where first the production cost rises in exporting countries, and second, the cost of transportation and insurance of goods increases. Domestic production is also influenced by rising fuel costs and agricultural inputs. Pressure on food prices comes from both outside and inside the economy.

Industry and construction are sensitive to energy and imported material prices. The increase in the cost of cement, iron, and other materials affects private project costs, real estate prices, and medium-term investment planning. Uncertainty about prices and input volatility creates project delays and slows investment decision-making.

Tourism is affected more indirectly, but rising operating costs such as energy, transport, and food supplies translate into higher prices for accommodation and gastronomy services. In a highly competitive regional market, any price increase not accompanied by quality improvement creates a risk of reduced competitiveness compared to alternative Mediterranean destinations.

Overall, the sectoral impact does not remain isolated in the fuel sector but spreads to agriculture, industry, construction, and services, affecting both supply and demand.

Fiscal and monetary risk

A new energy shock of geopolitical origin would immediately create tension in the country’s fiscal and monetary architecture. In the first phase, price increases automatically lead to higher nominal revenues from VAT and excises, as taxation is applied on the higher value of goods. At first glance, the budget benefits from inflation.

However, this is a temporary and partial effect. Price increases reduce real consumption, especially in middle- and low-income groups. Over the following months, the real taxable base narrows, while social and political pressure for budgetary interventions increases.

The government faces demands for energy and fuel subsidies, support for sensitive sectors such as agriculture and transport, and relief measures for vulnerable households. These interventions, if not targeted and temporary, may worsen the fiscal deficit and increase public debt in an already uncertain international environment.

The Bank of Albania faces a classic dilemma: monetary tightening may slow economic growth, while a more accommodative policy may consolidate inflation expectations. The maneuvering space is limited because imported inflation is not directly controlled by domestic monetary policy.

Psychological effect

Beyond objective cost factors, expectation dynamics play an important role in Albania. Experience from previous crises has shown that the market often reacts based on forecasts, not only on realized facts.

Traders raise prices in advance, and consumers accelerate purchases, creating self-reinforcing inflationary spirals.

Managing expectations and public communication becomes as important as cost management.

Possible scenario for Albania

If tensions in the Strait of Hormuz escalate, the impact on Albania may follow a three-phase trajectory:

Short term (0–6 months). The first phase will be characterized by an immediate price response. The rise in oil prices in international markets will be transmitted almost automatically to the domestic fuel market. Imported inflation will increase, initially concentrated in energy and food, but will quickly extend to other goods and services categories.

During this period, there is a real risk of expanding trade margins, as uncertainty and volatility are used as arguments for preemptive price increases. Negative expectations may reinforce the inflation cycle beyond the pure cost impact.

Medium term (6–18 months). If energy pressure persists, the economy enters a phase of deeper adjustment. Real consumption begins to slow, as incomes do not compensate for price increases. Middle- and low-income groups reduce discretionary spending, affecting trade and service sectors.

Uncertainty about costs and future demand increases hesitation in private investments. Projects are postponed or revised, while credit becomes more selective. At the same time, pressure on small businesses may encourage increased informality as a survival mechanism, further weakening the tax base and market transparency.

Long term (>18 months). If energy crises become more frequent or structural, the impact will shift from cyclical to transformative. Pressure will increase for restructuring energy sources, including supply diversification and strengthening domestic production capacities.

Debates on energy security, strategic reserves, and regional integration will gain more weight on the economic agenda. Simultaneously, it will become necessary to strengthen anti-speculative mechanisms and increase transparency in supply chains to avoid amplification of external shocks.

Recommended measures to address energy and inflation scenarios in Albania

To reduce the vulnerability of the Albanian market and economy to external crises such as a Strait of Hormuz tension, from our analysis and past experience, we have summarized a package of measures focused on four main pillars: energy security, market stability, institutional strengthening, and medium-term strategy.

Energy security and supply diversification

It is necessary to increase strategic reserves of fuels and gas, ensuring several months of domestic supply and reducing sensitivity to international fluctuations. Diversification of energy routes and suppliers through investment in imports from alternative countries and distributed contracts reduces dependence on a single node or supplier. Promotion of renewable sources and regional integration of electricity provides flexibility and reduces exposure to fossil fuel prices. Planning for reduced intensive fuel consumption by encouraging public transport and energy efficiency helps manage costs and market stability.

Market stability and consumer protection

Transparency in supply chains for strategic sectors such as fuels and basic foods must be increased. Anti-speculative mechanisms monitoring price increases above real costs and providing administrative corrections help curb artificial inflation waves. Targeted policies for vulnerable consumers include subsidies for energy, transport, or basic foods for lower-income groups. Managing expectations through clear public communication about price trends, stocks, and government measures reduces psychological effects and the inflationary spiral.

Institutional and macroeconomic strengthening

Fiscal capacity for crises requires emergency funds and budgetary flexibility to balance the effect of price increases on consumers and businesses. Proactive and flexible monetary policy aligns the Bank of Albania’s stance between price stability and economic growth support using fast and targeted instruments. Monitoring informality and supply chain transparency helps prevent crisis amplification through excessive margins. Increasing sectoral resilience through investments in logistics and domestic infrastructure reduces the impact of energy prices on key sectors.

Medium-term and strategic measures

The national energy strategy includes long-term diversification and use of renewable energies to reduce sensitivity to fossil fuel prices. Intersectoral crisis planning with simulations, protocols, and agency coordination ensures minimal supply of energy, food, and critical services. Improving market competition and breaking concentration in certain strategic sectors prevents price increases amplified by limited supply. Educating and raising awareness among consumers and operators helps minimize panic buying and preemptive price increases, reducing psychological impact.

Overall, these combined measures increase the resilience of the Albanian economy, slow crisis transmission, and create opportunities for more sustainable management of price growth and inflationary pressure.