Strait of Hormuz crisis could ripple through Malta’s economy, experts warn

Iran’s threat to close the Strait of Hormuz following attacks by the US and Israel could trigger economic shocks that will inevitably reach Malta, experts warn.

Once described as Iran’s “jugular vein” by former Iranian prime minister Abbas Hoveida, the Strait of Hormuz is the key thoroughfare for around 20 million barrels of oil and a fifth of the world’s natural gas each year.

Since the beginning of the conflict, at least 16 oil, cargo and other tankers have been attacked as they attempted to cross the Strait of Hormuz, according to a New York Times analysis.

This included a Malta-flagged Egyptian container ship travelling to Saudi Arabia, which was struck by two missiles.

Government officials have been quick to reassure the public that consumers will not bear the brunt of the economic fallout.  

Last week, Energy Minister Miriam Dalli said consumer prices would remain unchanged, with the government set to retain energy subsidies that were first introduced at the time of Russia’s invasion of Ukraine.

Meanwhile, Finance Minister Clyde Caruana pledged a €250 million “war chest” to cushion the impact of the conflict.

In a wide-ranging speech in parliament on Wednesday, Caruana warned against drawing parallels between today’s situation and that of 2022, when energy prices exploded in the wake of Russia’s invasion of Ukraine.

While the Ukraine invasion put a chokehold on the supply of natural gas, Malta’s main source of energy, today’s war in the Gulf is primarily impacting oil, making it less of a direct concern, he argued.

Ultimately, Caruana said, natural gas prices are now hovering around the €50 per megawatt hour mark, seven times lower than what they were in 2022, reflecting the more modest price spikes this time around.

Although consumers may not see any change in their electricity bills, the price rises will nonetheless put a dent in Malta’s finances.

However, Malta is, at least partly, protected by several hedging agreements which freeze the prices at which Malta imports gas and other fuel.

Sources say Malta’s gas prices are locked in until the summer, while petrol prices should remain fixed until the end of the year. Diesel prices, on the other hand, are not believed to be subject to a hedging agreement.

Force Majeure

However, whether fuel suppliers will honour hedging agreements is increasingly coming under question.

In recent days, several of the world’s top energy producers have invoked Force Majeure clauses in their contracts and shut down production or distribution altogether.

Companies in Qatar, Kuwait and Bahrain have all taken this unprecedented step, as has Shell, the world’s largest LNG trader.

Shell has reportedly frequently supplied Malta with natural gas through SOCAR, Azerbaijan’s state-owned energy giant.

After buying its gas from suppliers such as Shell, SOCAR sells it to Electrogas, which, in turn, sells it to Enemalta to distribute through Malta’s grid.

It is unclear whether any of the suppliers from which SOCAR procures the gas it eventually sells to Malta have invoked Force Majeure clauses or altered their operations as a result of the war.

Electrogas has said Malta’s supply of gas originates from the Atlantic Basin, rather than the Gulf, suggesting the direct impact on Malta’s supply would be limited.

However, energy experts who spoke to Times of Malta warn the situation could be more complex, with Qatari natural gas being the main source of energy across much of Asia.

“With Qatari gas suppliers off the market, you’re suddenly in tough competition with Asian countries for the remaining supplies of natural gas. And you’re unlikely to outbid Asian countries,” one energy expert said.

Worries over Europe’s gas reserves are not new, with reports at the beginning of the year suggesting the continent’s gas storage levels were at their lowest point in four years.

Speaking to Times of Malta, engineer Arthur Ciantar questioned whether Malta is sticking to its EU obligations for fuel reserves.

“Malta is supposed to have a 90-day reserve of fuel to protect itself from spikes in prices, specifically intended for times like these. What happened to this?” he asked.

Fears of a global gas shortage have grown in recent weeks, prompting some countries to turn to a familiar face in a bid to secure their energy supply. On Friday, the US announced it would be easing tariffs on countries buying Russian oil.

The greatest exposure lies in oil-derived products

“Europe has turned away from its previous energy dependence on Russia, but the current situation is ultimately to Russia’s benefit,” economist Philip von Brockdorff said, describing how countries outside Europe are increasingly turning to Russia.

Nevertheless, experts say the situation remains highly volatile, with daily oil and gas price rises and dips often triggered by the vaguest of declarations by US or Iranian leaders.

Renewables overtake fossil fuels, but not in Malta

“The current situation is a refresher for people on why we need to accelerate the shift to renewables,” one energy expert told Times of Malta.

European legislators have moved to slash the continent’s dependence on fossil fuels since the 2022 energy crisis.

A recent report by global think-tank The Renewable Energy Institute found that renewable energy had now surpassed fossil fuels as the EU’s main source of energy, making up 30% of the power mix.

Things have moved more slowly in Malta, which remains among the continent’s most fossil-fuel reliant nations.

According to Enemalta’s most recent figures, Malta relied on natural gas for 60% of its fuel mix in 2024. A further third of its energy was generated through the Malta-Sicily interconnector, with just 7% coming from renewables.

But, it turns out, the interconnector is just as reliant on fossil fuels, with two-thirds of its energy generated by natural gas and a further 12% through coal.

Oil and gas derivatives impacted

Even if Malta were to successfully fend off the war’s impacts on its energy supply, other areas are less likely to be immune.

Oil and gas shortages could also mean higher production costs for a range of materials derived from fuels, from jet fuel to asphalt, plastic and even pharmaceuticals. These rises will inevitably be passed on to consumers, economists say.

“If jet fuel prices rise, both incoming and outgoing travel will become more expensive,” von Brockdorff warned. “Higher insurance costs for cargo and shipping will also be reflected in final prices,” he said.

“There could also be supply issues for materials such as cement and steel, which could feed into the cost of property and maintenance,” he added.

Ciantar agreed, saying “the greatest exposure lies in oil-derived products, since they are not typically tied to hedging agreements. Prices may be hiked up to make a quick buck”.

Fertiliser prices spike by 20%

Among the products most likely to be affected is fertiliser, much of which is produced using natural gas.

Farmers are bracing themselves for the spike in fertiliser prices, Għaqda Bdiewa Attivi president Malcolm Borg told Times of Malta, throwing an industry already teetering on a knife’s edge into further peril.

“Fertiliser prices have already exploded, rising by as much as 20%,” he said. “Fertiliser is arguably among any farmer’s greatest expenses, so this directly impacts their profit margins”.

Could the euro weaken?

Speaking in parliament, Clyde Caruana warned that the most problematic impacts from the war could be experienced in financial markets, not energy prices.

Wars typically bring about the strengthening of the US dollar and the weakening of the euro, Caruana argued, meaning it will cost more for European countries to buy essential products, many of which are still traded in dollars.

This is precisely the scenario that played out in the wake of the Russian invasion of Ukraine, Caruana warned.

Von Brockdorff is not convinced things will play out the same way this time around.

“Things have changed. China has built a strong trade network, and it’s not always trading in dollars. Other countries, such as Brazil, are also moving away from the dollar.”