Third time's the charm

Summary

Varða's analysis indicates that over 50% of Iceland's goods imports consist of product categories that can be affected by the closure of the Strait of Hormuz. The effects may be confined to price increases, but a prolonged disruption of shipping in the Persian Gulf increases the risk that deliveries of supplies are curtailed, delayed or fail altogether. Accumulated shortages and the destruction of production capacity mean that even if the war ended tomorrow, supply disruptions could persist for weeks or months. It is therefore unthinkable that the supply chains of Icelandic companies will remain unaffected.

• Download the analysis as a PDF.

Attention has focused mainly on the conflict's effects on fuel and energy markets, but after decades of globalisation the disruption reaches far beyond them. Crude oil, natural gas and their derivatives are foundational raw materials for a range of critical supplies such as fertiliser, pharmaceuticals, plastics and other synthetic materials.

The disruption of supply chains caused by the conflict in the Persian Gulf is the third supply shock in a short period; supply chains were severely disrupted both when the COVID-19 pandemic struck and in the wake of Russia's invasion of Ukraine. Unpredictability in international affairs has thus become a persistent condition.

Iceland relies on imports of essential supplies for food production, healthcare, export industries and other critical activities. It is therefore urgent that the country be prepared for disruption of this kind. Resilience against prolonged disruptions to international supply chains must be strengthened through a greater emphasis on security of supply, including by establishing security stockpiles of indispensable supplies.

Stockpiles, their procurement and the production of goods are at present overwhelmingly in private hands, so ensuring security of supply requires close cooperation between government and business. A shortage of certain supplies, such as oil, can create problems elsewhere, for instance in food production. The issue therefore cuts across the remits of ministries and agencies.

To address this, Varða proposes that the government establish a central unit to build up the knowledge and capacity needed to strengthen security of supply, including through the long-term development of necessary security stockpiles. Models could include Finland's National Emergency Supply Agency (NESA) or Switzerland's FONES, both of which are responsible for this policy area and manage public-sector cooperation with companies.

1. The current crisis

Following the American and Israeli strikes on Iran, the latter responded with counterattacks on Persian Gulf energy infrastructure and by closing the Strait of Hormuz to nearly all shipping. The war is now in its ninth week, yet despite peace efforts in recent weeks and repeated ceasefire declarations, shipping through the strait remains at only around a tenth of its previous level.1

The strait is one of the world's most important transport routes. Around a fifth of global oil and natural gas production takes place in the Persian Gulf, and traffic through the strait is therefore a precondition for crude oil, fuels and the many derivatives indispensable to international supply chains reaching their destinations.2 The estimated cumulative loss of supply now stands at between six and seven hundred million barrels of oil. Emergency stocks controlled by member states of the International Energy Agency (IEA) amount to twelve hundred million barrels, of which the release of four hundred million barrels has already been authorised.3

Below, five production categories are discussed and the effects of the current situation assessed.

1.1 Fuel and energy

All categories of fossil fuel are affected, as both production capacity and flows of crude oil and natural gas have been significantly curtailed by the conflict. Crude oil prices have risen by more than sixty per cent on futures markets and even more on the spot market (the cash price at delivery). Crack spreads have also widened in the wake of the conflict, partly because refineries have cut production to avoid shutdowns should crude oil shortages persist. Refined products such as petrol, diesel and jet fuel store less well than crude oil, and their stock levels are therefore generally lower. As a result, product prices have risen considerably more than the price of crude.

Effects: Higher prices and rising inflation affect consumers immediately. Higher jet fuel prices feed through into travel costs, with corresponding effects on international travel and demand for tourism.4 Higher marine fuel prices can weigh on the profitability of fisheries companies. There is also a risk that rising global transport and energy costs feed through into general consumer prices; domestic transport companies have already imposed an emergency surcharge on domestic freight in response to higher fuel prices.5 Supply disruptions can also cause localised fuel shortages and thereby disruptions to transport and logistics. The International Air Transport Association (IATA) believes flights could be cancelled in Europe from the end of May onwards owing to jet fuel shortages at European airports, and a large number of airlines have already reduced capacity and cancelled planned summer flights in response to higher fuel costs.6

1.2 Fertiliser and food production

Up to thirty to forty per cent of the world's fertiliser exports originate in the Persian Gulf.7 The Gulf states are among the world's largest fertiliser producers, and oil and gas extraction also yields ammonia and sulphur, raw materials essential for fertilisers such as urea. This in turn affects the supply of carbon dioxide, a by-product of fertiliser production with a wide range of uses in industry, healthcare and food production.

Effects: Icelandic fertiliser suppliers had largely secured fertiliser for the current season,8 but there is a risk that fertiliser prices will rise and reliability of delivery deteriorate in the coming months. This could affect domestic agriculture, and in addition the risk of crop failures worldwide increases, driving up the price of imported food and animal feed and potentially threatening food security. Analysis by the British government indicates that a carbon dioxide shortage could increase the risk of food shortages as early as this summer, as carbon dioxide is commonly used for slaughter in industrial livestock farming, in beverage production, food packaging and greenhouse cultivation.9

1.3 Plastics and synthetic materials

Almost all primary production of plastics and various synthetic materials relies either on the feedstock naphtha, which is derived from crude oil, or on natural gas (ethane/propane). Methanol from the Persian Gulf is also a key input for the plastic coating of packaging and the manufacture of many industrial plastic products. These materials have already risen in price, and in addition a number of plastics producers, particularly in Asia, have declared force majeure and either raised prices or stopped guaranteeing deliveries.10

Effects: It would take too long to list every product that could be affected. Examples include essential single-use medical products such as syringes, IV bags, tubing and protective equipment; bale wrap and greenhouse plastic in domestic agriculture; fish tubs and net twine; clothing and footwear made of synthetic materials; building materials, plastic piping and insulation; car tyres and other rubber products; and various packaging and transport packaging for domestic food production and exports, such as polystyrene boxes for fresh fish. In many cases these are products that are difficult to substitute. That is without counting the effects on domestic producers of plastic and synthetic-material products.

1.4 Helium

Around thirty per cent of the world's helium supply is produced in the Persian Gulf as a by-product of natural gas production. Storing helium is rather challenging, as the gas particles are minute and the element's boiling point is low. A helium cargo on a transport vessel evaporates within six weeks, and helium supply chains are therefore especially vulnerable to disruption. Helium producers and distributors have already declared force majeure and restricted deliveries because of the conflict.11

Effects: Helium is an essential coolant in a wide range of industrial production, including the manufacture of processors and graphics cards, which play a key role in the spread of artificial intelligence and are essential to the operation of data centres. Helium is also used to cool the magnets in MRI machines; without helium, hospitals cannot perform MRI scans.12

1.5 Pharmaceuticals

By-products of oil refining are essential to a wide range of pharmaceutical production and are used to make active pharmaceutical ingredients (APIs) in numerous common medicines. Various oil-derived polymers and solvents are also used in the production of tablets and capsules.13

Effects: Negative effects on the production of many common medicines, not least inexpensive generics from Asia where operating margins are thinner, including painkillers such as paracetamol and ibuprofen, antibiotics such as amoxicillin, and so on. Although significant medicine shortages have not yet materialised, the prices of various medicines have already risen, and experts in both the United Kingdom and the United States have voiced concern about the effects of a prolonged closure of the Strait of Hormuz on the security of medicine supply.14

2. Effects on Icelandic supply chains

Iceland imports relatively little directly from the coastal states of the Persian Gulf; last year imports from the region amounted to around ISK 10 billion. The globalisation of trade means, however, that even localised supply disruptions spread through price increases and the rerouting of supply chains. To assess the scale of the potential effects of the closure of the Strait of Hormuz on Iceland, we divide imported goods and supplies into three categories according to how large and how rapid the effects will be.15

1. The first category comprises products shipped in large volumes through the Strait of Hormuz, which are therefore directly affected, such as fuel and fertiliser.
2. The second category comprises various products that depend to a significant degree on inputs shipped through the Strait of Hormuz, and which are therefore indirectly affected by supply-chain disruption, such as food, animal feed, computer equipment and various energy-intensive industrial goods.
3. The third category then comprises products that depend to a limited degree on inputs shipped through the Strait of Hormuz and are unlikely to face significant disruption.

Varða's analysis shows that over half of Iceland's goods imports (measured by value) fall into the first two categories, which are highly or fairly exposed to the effects of the closure of the Strait of Hormuz.

Last year Iceland imported supplies falling into the first category worth around ISK 177 billion, or about 13 per cent of all goods imports. Fossil fuels weigh heaviest, at around ISK 125 billion (including motor fuel, marine fuel and jet fuel). Imports of plastics and industrial plastic goods amounted to around ISK 38 billion, imports of various organic chemicals and gases to around ISK 10 billion, and fertiliser imports to around ISK 4 billion.

Last year Iceland imported supplies falling into the second severity category worth around ISK 560 billion, or about 40 per cent of all goods imports. The largest items are computer equipment linked to data-centre investment, worth ISK 171 billion, and imported food worth around ISK 115 billion. Imports of building and plumbing materials and various metals amounted to around ISK 65 billion, textiles and clothing to around ISK 55 billion, and so on.

Last year Iceland imported goods and supplies falling into the third category worth around ISK 669 billion, comprising all of the country's other goods imports.

3. Recommendations

Iceland relies on imported raw materials and energy to sustain a large share of its exports, food production and other critical activities. Medicines, food, spare parts and other consumer goods are likewise largely imported. Despite this vulnerable position, Iceland has so far made no substantial, systematic investment in data collection on stock levels, in the resilience of supply chains or in building up security stockpiles.

It is self-evident that emergency responses are best decided and prepared before an emergency strikes. The world's last major supply-chain crises occurred in the wake of the COVID-19 pandemic and Russia's invasion of Ukraine almost five years ago. In their aftermath, the government published a detailed report on the state of emergency stockpiles in Iceland.16

Its main recommendations centre on entrusting a single body with overall responsibility for supervising and monitoring emergency stockpiles in the country. Such a body would define the supplies that are vital to the nation, assess the necessary stock levels, collect data and coordinate action across ministries, agencies and private actors.

Important lessons can be drawn from best practice abroad, such as from agencies like NESA in Finland and FONES in Switzerland. Domestic precedents can also be looked to, such as the sector groups of CERT-IS. That cooperation could serve as a model for broader-based collaboration on security of supply.

Four considerations argue particularly for a central unit:

Specialised expertise: Analysing complex supply chains and vulnerabilities requires specialist knowledge so that tasks can be prioritised sensibly. Given the small size of Iceland's public administration, such expertise is more likely to build up within a central unit than through a dispersed approach. Security stockpiles should be one body's core mission rather than a side task scattered across the system.

Continuity and stability: The unit needs latitude and shelter from day-to-day politics to ensure continuity in this policy area.

Funding and flexibility: The unit needs a mandate and funding to invest in stockpiles and to use flexible solutions, such as agreements with companies on holding surplus stocks, loan guarantees, lending or direct purchases. Managing the financial structuring of such agreements is complex, so it seems most sensible for that expertise to be centralised.

Cooperation with the private sector: It is essential to build trust and a continuous relationship with the companies connected to indispensable supplies. Company representatives should be engaged in analytical work and planning, as they possess active links to foreign markets.

The third major shock to international supply chains in a short period is now under way. Its effects on Iceland are still unclear, but it is certain that they will prove difficult for us. It would have been better had we already secured security stockpiles of essential goods after the last two shocks, as envisaged in the report of the working group on emergency stockpiles. But the third time is the charm. Let this third serious reminder of the need for action be a genuine spur to action. We cannot always count on things working themselves out in the end.

Kristinn Árni L Hróbjartsson is co-founder and director of Varða. Hafsteinn Hauksson is chief economist at Kvika.

1. Bloomberg, “Hormuz Tracker: Widespread U-Turns Take Place Amid Iran Warning,” 18 April 2026, https://www.bloomberg.com/news/articles/2026-04-18/hormuz-tracker-widespread-u-turns-take-place-amid-iran-warning ↩︎
2. U.S. Energy Information Administration, “World Oil Transit Chokepoints,” https://www.eia.gov/international/analysis/special-topics/World_Oil_Transit_Chokepoints ↩︎
3. International Energy Agency, “IEA Member Countries to Carry Out Largest Ever Oil Stock Release Amid Market Disruptions from Middle East Conflict,” https://www.iea.org/news/iea-member-countries-to-carry-out-largest-ever-oil-stock-release-amid-market-disruptions-from-middle-east-conflict ↩︎
4. Japan Airlines, press release, 20 April 2026, https://press.jal.co.jp/en/release/202604/009487.html ↩︎
5. Viðskiptablaðið, “Tímabundið neyðarálag lagt á innanlandsflutninga” (Temporary emergency surcharge imposed on domestic freight), https://vb.is/frettir/timabundid-neydaralag-lagt-a-innanlandsflutninga/ ↩︎
6. International Air Transport Association, press release, 17 April 2026, https://www.iata.org/en/pressroom/2026-releases/2026-04-17-01/; The Independent, “Jet Fuel Shortages Trigger Flight Cancellations Across Major Airlines,” https://www.independent.co.uk/travel/news-and-advice/jet-fuel-flight-cancellations-lufthansa-united-easyjet-air-india-b2965365.html ↩︎
7. IFPRI, “The Iran War’s Impacts on Global Fertilizer Markets and Food Production,” https://www.ifpri.org/blog/the-iran-wars-impacts-on-global-fertilizer-markets-and-food-production/ ↩︎
8. Bændasamtök Íslands, “Stríðið hefur áhrif á áburðarverð” (The war affects fertiliser prices), https://www.bbl.is/frettir/stridid-hefur-ahrif-a-aburdarverd ↩︎
9. Bændasamtök Íslands, “Metinnflutningur á koltvísýringi” (Record imports of carbon dioxide), https://www.bbl.is/frettir/metinnflutningur-a-koltvisyringi; The Guardian, “UK Faces Possible Food Shortages Due to Iran War CO₂ Disruptions,” 16 April 2026, https://www.theguardian.com/business/2026/apr/16/uk-possible-food-shortages-iran-war-co2 ↩︎
10. Bloomberg, “Plastic Bottle Makers Get Pinched by War-Driven Forces Majeures,” 1 April 2026, https://www.bloomberg.com/news/articles/2026-04-01/plastic-bottle-makers-get-pinched-by-war-driven-forces-majeures ↩︎
11. NPR, “Strait of Hormuz Closure Deflates Global Helium Supply,” 3 April 2026, https://www.npr.org/2026/04/03/nx-s1-5762568/strait-of-hormuz-closure-deflates-global-helium-supply; Foreign Policy, “Iran War Threatens Helium and Semiconductor Supply Chains,” 27 April 2026, https://foreignpolicy.com/2026/04/27/iran-war-hormuz-strait-helium-semiconductors-chips-supply-chain-prices/; Financial Times, “Why the helium shortage matters for chipmakers,” 31 March 2026, https://www.ft.com/content/cda276a7-f610-4c0b-b984-52419f62e8ee ↩︎
12. Euronews, “Helium Supply Crunch Puts MRI Services at Risk Amid Qatar Disruptions,” 25 March 2026, https://www.euronews.com/business/2026/03/25/helium-supply-crunch-puts-mri-services-at-risk-amid-qatar-disruptions ↩︎
13. The Guardian, “NHS on High Alert Over Healthcare Shortages Linked to Iran War Petrochemicals,” 26 April 2026, https://www.theguardian.com/society/2026/apr/26/nhs-high-alert-healthcare-shortages-iran-war-petrochemicals ↩︎
14. The Guardian, “UK Weeks Away from Medicine Shortages, Iran War Impacts Experts Warn,” 28 March 2026, https://www.theguardian.com/business/2026/mar/28/uk-weeks-away-medicine-shortages-iran-war-impacts-experts-warn; The Independent, “Drug Shortages Linked to Strait of Hormuz Closure,” https://www.independent.co.uk/news/health/drug-shortages-strait-of-hormuz-iran-war-b2958885.html; CNBC, “Strait of Hormuz Closure Hits Generic Drug Prescriptions,” 16 March 2026, https://www.cnbc.com/2026/03/16/strait-of-hormuz-closure-generic-drug-prescriptions.html ↩︎
15. Although such a classification is not clear-cut, it represents an attempt to assess the severity of disruption for each category of goods imported to Iceland according to the United Nations SITC2 classification standard. It should be noted that the value of imports does not in all cases reflect the economic importance of supplies. A relatively cheap imported good may be critical to the production of another, high-value product. For example, relatively cheap plastic could be critical to the production and export of valuable medical devices or pharmaceuticals. A tangible shortage of essential supplies with limited substitutability can therefore cause significant disruption to production processes despite accounting for a small share of production costs. ↩︎
16. Government Offices of Iceland, “Skýrsla starfshóps um neyðarbirgðir” (Report of the working group on emergency stockpiles), 18 August 2022, https://www.stjornarradid.is/library/01–Frettatengt—myndir-og-skrar/FOR/Fylgiskjol-i-frett/Sk%c3%bdrsla%20starfsh%c3%b3ps%20um%20ney%c3%b0arbirg%c3%b0ir%2018%20-08.pdf ↩︎