The double whammy of oil prices and currency strengthening

The armed conflict in Iran, which has included attacks by the US and Israel leading to the effective closure of the Strait of Hormuz, has caused an unprecedented shock to global energy markets.

Brent oil prices have soared to over $120 per barrel at the height of the crisis, with large fluctuations that have kept them around $90-100 per barrel in March 2026, well above pre-conflict levels of around $70. This has disrupted around 20% of global oil and natural gas supplies, creating an energy crisis that is quickly spreading to small, open economies like Albania, which is completely dependent on fuel imports.

In Albania, the increase in fuel prices acts as a horizontal shock that immediately affects transport, logistics and supply chains.

Fuel is a basic input for the transport of goods, agricultural machinery, construction machinery and the functioning of the manufacturing industry. The cost of transportation increases significantly, being transmitted to the final prices of food, construction materials, industrial products and tourist services.

In agriculture, where fuel accounts for 20-30% of operating costs, food prices increase, adding to food inflation that weighs about 35-40% in the consumer basket.

In construction and tourism, the pressure on operating costs reduces profit margins and slows down activity.

For citizens, this translates into an increase in the cost of living, with more expensive transportation and higher prices for almost every good and service, reducing purchasing power and exerting social pressure.

This effect is amplified by the euro-lek exchange rate, which in March 2026 is moving around 96 lek per euro, with a slight tendency for the euro to strengthen in the medium term 2026-2028 according to macroeconomic forecasts.

Albania has high financial and trade euroization with over 55% of deposits and around 45% of loans in euros.

A strengthening of the euro (or weakening of the lek) immediately increases the cost of energy imports paid in foreign currency, even if the international price of oil partially stabilizes.

This creates a double whammy, where the high global oil price from the Iran war combines with the exchange rate effect, adding to imported inflationary pressure and widening the trade deficit. Production and transportation costs rise further, exacerbating cost-push inflation affecting key sectors such as agriculture, construction, industry and tourism.

On the relative positive side, the strengthening of the euro improves the competitiveness of Albanian exports and increases the lek value of remittances and tourism revenues, which constitute a significant part of GDP. However, for an economy that imports over 90% of its energy and intermediate inputs, the net effect remains negative: the increase in production costs outweighs the benefits from exports and tourism. In the financial sector, the burden of euro-denominated loans increases for those generating income in lek, risking an increase in non-performing loans if the depreciation continues without a proportional increase in wages.

From a fiscal perspective, in the short term, budget revenues may increase due to higher VAT on prices and a fixed excise tax on fuel, but if the pressure persists, consumption falls, activity slows down and indirect tax revenues turn negative.

Finally, the war in Iran has created a global energy crisis that, combined with the possible strengthening of the euro against the lek in 2026-2028, poses a major challenge for the Albanian economy.

This double whammy increases inflation, production costs, and uncertainty, requiring prudent monetary and fiscal policies to protect stability and citizens’ purchasing power.

The exchange rate and fuel prices remain two of the most important channels of transmission of external shocks to Albania.