Oil is one of the most important resources in the global economy. It provides vital fuel for vehicles, industries, electricity production and is essential in transporting goods around the world. Oil has proved to be an indispensable resource for many developing and growing economies. But when war interrupts oil production or transportation, its effects can be felt beyond the affected countries.
The International Monetary Fund’s (IMF) analysis of the implications of the Middle East conflict on energy trade and finance identifies the ways in which energy-related disruptions can affect the global economy. The main issue is not simply the price of oil, but how rising global oil prices affect the overall economy.
How War Affects Global Oil Markets
The price of oil is dependent on supply, demand and expectations about future supply. Wars have the potential to disrupt these forces by damaging oil production and shipping infrastructure and creating uncertainty about global supply.
The Middle East is particularly important to global oil markets due to its role as a major producer and transportation hub. The strait of Hormuz holds particular significance as it is the location through which much of the world’s trade in oil moves. A major disruption to the strait of Hormuz would have immediate and widespread effects on the global supply and price of oil.
An uncertain supply can cause prices to rise even before a supply shock. Shipping companies may charge higher rates, insurance costs may rise and importers may compete to buy oil at higher prices. These additional costs can compound the price of energy even for countries that are not directly affected by a disruption to oil production or transportation.
The International Energy Agency’s oil market report (March 2026) described the disruption to Middle East energy supplies as exceptionally severe and noted that oil prices had at one point neared $120 per barrel during the period that the IEA’s analysis covered. Additionally, the IEA’s report described how a global release of emergency oil stocks had taken place to help meet demand.
This demonstrates how a regional conflict has the potential to become a major economic challenge for oil-importing countries. Even after combat has ceased, disrupted infrastructure, shipping and rising insurance costs can prolong the economic effects of reduced oil supply.
Why Growing Economies Are Particularly Vulnerable
Growing economies need a reliable and affordable supply of energy to grow. Domestic production of oil may not meet demand, leaving oil-importing countries reliant on volatile international prices.
This exposes oil-importing countries to additional risks. Rising international oil prices will increase a country’s expenditure on energy imports. Unlike oil exporting countries, oil importing countries will not see additional revenues from rising oil prices.
The impact of rising oil prices is particularly acute for developing economies due to their existing fiscal and economic challenges. Governments will face additional pressure to provide support to businesses and families struggling to meet rising energy costs. Public debt, infrastructure expenditure, employment rates and inflation can all play a role in a country’s ability to respond to a rise in oil prices.
The IMF’s analysis demonstrated that the impact of an energy shock on an economy is dependent on the level of oil imports and the ability of the country to provide financial support to families and businesses.
As a result of these differences, the economic effects of rising oil prices can be very different for different countries. Those with diversified energy sources and access to financial reserves are better positioned to withstand a short-term shock than countries that are dependent on oil imports and have a smaller fiscal budget.
India: Higher Import Costs and Inflationary Pressure
India is an excellent example of the impact of rising oil prices on a growing economy.
India relies on oil imports to meet its energy needs. The ISAS analysis highlighted that approximately 85% of India’s crude oil requirements are met through imports, exposing India to additional risks from a disruption to global oil supplies.
1. A Higher Oil Import Bill
Rising international crude oil prices will increase India’s oil import bill. As a result, India will spend more on its energy needs. The ISAS analysis estimated that a rise in oil prices will add between $10 increase in the price of a barrel of crude oil and can add approximately $13–15 billion to India’s annual oil import bill depending on import volumes and other factors.
This means that a higher amount of India’s foreign exchange reserves will be spent on energy imports. This can place additional strain on the country’s current account deficit, which measures the difference between a country’s total exports and imports. A higher deficit can make an economy more vulnerable to fluctuations in global markets.
2. Inflation and the Cost of Living
India’s rising oil prices will be reflected in higher prices for many other goods and services.
Fuel is an important input into many other aspects of the economy including agriculture, manufacturing, logistics, aviation and public transport. Increases in fuel prices will increase the cost of transporting goods, materials and people, as well as the cost of manufacturing. These additional costs may be passed on to consumers in the form of higher prices.
An increase in fuel prices is likely to increase the cost of living for many families. Increased costs are likely to be more severe for low-income families as a higher proportion of their income is spent on essential goods such as food and transport.
3. Pressure on the Rupee
Higher oil prices can place additional pressure on the value of the Indian Rupee. Importers will need to purchase more foreign currency (such as US dollars) to buy oil. This can lead to a depreciation of the Rupee.
The combination of increased oil prices and a weaker Rupee can create a cycle in which higher prices are compounded by the depreciation of the Indian currency. The Reserve Bank of India faces a difficult balancing act between controlling inflation and allowing the Rupee to depreciate.
4. Challenges for Government Spending
The Indian Government faces a difficult balancing act between protecting its citizens from the rising costs and maintaining its own fiscal viability. Fuel taxes and subsidies may need to be adjusted as businesses and families are affected by the changes in the oil price. The longer that higher oil prices persist, the more of a burden they can place on a government’s budget.
China: Energy Security and Industrial Production
China, as a large oil importer compared to India, presents an interesting contrast as it has a substantial industrial economy, but is vulnerable to worldwide oil prices (although its energy security, domestic production, supply chains and strategic reserves are quite different to that of India).
According to the US Energy Information Administration, China imported a record daily average of about 11.6 million barrels of crude oil in 2025. Imports fell to around 8.1 million barrels per day in the second quarter of 2026, after rising oil prices and disrupted Strait of Hormuz shipping. The decrease has been driven by a decrease in crude oil purchases and refining activity, as well as inventory drawdowns.
Effects on manufacturing and trade
China’s substantial manufacturing sector spans a wide range of industries, from chemicals and steel to plastics, transport equipment, and consumer goods. Higher oil prices may increase the costs of petroleum-based materials, shipping and manufacturing processes.
The resulting higher costs may eat into manufacturing margins or result in higher prices for products. If manufacturers incorporate the higher costs into their prices for overseas customers, the costs may be transferred down the supply chain.
China’s status as a major exporter means that the indirect effects of the oil shock may extend beyond its domestic economy. Increased production and shipping costs may make some Chinese products less competitive and affect companies that buy materials and components from China.
Strategic reserves and supply diversification
Although China’s strategic response to the oil shock is not identical to that of India, it has a few options to address the situation. It has domestic crude oil production, multiple sources of import, pipeline infrastructure, and significant strategic reserves that may help it weather this disruption relatively easily.
The record-breaking oil imports in 2025 were followed by a period of stockbuilding as prices were relatively low, according to Reuters. Although strategic reserves are a short-term solution and cannot mitigate the impact of prolonged or severe supply disruptions, over the long-term, China will need to address its vulnerabilities to energy security.
Southeast Asia: Different Economies, Shared Energy Risks
Discussing Southeast Asia jointly with India and China is valid because of the region’s energy security risks and general economic profile, but not all Southeast Asian countries are the same, as some are net exporters of oil, gas and coal, some are energy-import dependent, and some are major refining or trading centres.
The International Energy Agency’s ASEAN Energy Security Review provides the best analysis of the energy security situation in Southeast Asia. According to the IEA, its most recent data in its table indicates a crude oil import dependency of roughly 97% in the Philippines, 87% in Thailand, and 56% in Vietnam.
Meanwhile, Indonesia’s crude oil import dependency was around 32%, but its oil product import dependency was closer to 36%. These numbers are based on different years, as the 2024 figures apply to crude oil, and 2025 to other fuels.
Indonesia: Pressure on fuel subsidies and public spending
Indonesia has domestic oil production but also imports crude oil and petroleum products. Higher oil prices could increase the burden on the government budget if the domestic price of fuel is kept artificially low through subsidies or price control.
If the government absorbs the higher costs, it will have to make difficult decisions about public spending and investments as it will have less money to fund infrastructure projects, education, healthcare and other public goods. On the other hand, if fuel prices are allowed to rise, business costs and pricing will increase, contributing to inflation.
Indonesia’s energy security risks extend beyond crude oil pricing, as its industrial economy is dependent on energy and commodity prices, and its position as a major source of nickel makes its manufacturing supply chains vulnerable to energy and material costs.
Vietnam: Manufacturing and export competitiveness
Vietnam has a rapidly growing export-oriented manufacturing sector. While this is a strength in many ways, it exposes the Vietnamese economy to energy and shipping costs as reliable and affordable energy is essential to manufacturing, and transportation and logistics are vital to trade. Higher oil prices may increase factory costs, shipping costs, and the price of imported materials, which in turn may impact export competitiveness as Vietnam’s manufacturing costs increase relative to its competitors.
If global oil prices rise faster than the pace of economic growth in Vietnam, its manufacturers may experience margin squeezing. This is particularly of concern to smaller players, as they may be unable to offset the higher energy and logistics costs. Vietnam’s experience is a useful illustration of how an oil shock in international markets can reverberate in faraway economies through manufacturing, trade, and the supply chain.
Thailand: Transport, manufacturing, and tourism
The IEA’s latest available energy security table shows Thailand’s crude oil import dependency at around 87%. This means that international oil prices directly impact transport, manufacturing, and agricultural production, and indirectly tourism and retail prices.
Higher fuel prices may increase transportation costs, which in turn impacts the cost of doing business, retail prices, and the affordability of transport services. This can have a direct effect on tourism as well as to domestic retail prices and overall consumption.
The resulting rise in costs may require companies to raise product prices or reduce spending in other areas. Similar pressures can affect household budgets, with higher fuel costs impacting transport and retail prices, and subsequently the overall level of consumption.
The Philippines: Household costs and inflation
According to the IEA’s latest available data, the Philippines’ crude oil import dependency is among the highest in the region, at around 97%, and its oil product import dependence was around 78%.
This means that higher oil prices may have a direct impact on transport, electricity generation (where oil based fuels are used), and the retail price of food and other essential goods. As a result, consumers may see higher prices for everyday products and reduced purchasing power.
This is particularly of concern to Philippine households with limited means and smaller businesses that do not have the capacity to absorb higher energy and logistics costs. Temporary support measures provided by the government to households and transporters may alleviate some of the pressure, but policy-makers may be hard-pressed to provide long-term compensation without significant budgetary costs.
Malaysia: Domestic production does not eliminate exposure
Malaysia is somewhat of an outlier in the region as it is an energy producer rather than a consumer. Domestically produced oil and gas can insulate the Malaysian economy from some of the impacts of an oil shock, and higher prices may benefit producers and government budgets.
However, Malaysia is not immune to the effects of higher energy prices. Its energy-intensive industries, transport and logistics sector, and reliance on seaborne trade exposes it to some of the same challenges as its neighbours.
The Malaysian economy has sufficient resources to withstand an oil shock, but the benefits of higher oil prices will not be felt across the board. They will be visible first and foremost in higher producer prices for fuels and in government revenues from higher oil and gas prices at the export pumps.
Bangladesh: A Supporting Example of Developing-Economy Vulnerability
Bangladesh illustrates the impact of an oil shock on a developing economy that relies on importing for transportation, electricity generation, and manufacturing. According to The Financial Express, higher oil prices may increase import costs, external imbalances, and production costs for businesses, and subsequently the price of food and other goods.
Import costs and resulting higher prices for energy-intensive products can squeeze households with low discretionary income. Businesses may have to balance higher energy and logistics costs, while governments may have to support households and businesses in the wake of an oil price shock.
Bangladesh is a useful example to discuss, but consider it as one country in the region, rather than the regional economy as a whole. In combination with the discussion of India, China, and Southeast Asian oil importers, it provides a more nuanced discussion of energy security.
What These Country Comparisons Tell Us
The discussion of the energy security implications of an oil price shock in India, China and Southeast Asia illustrate the different ways in which an energy shock can reverberate in an economy. India’s main concerns are its large import bill, foreign exchange risks, and inflationary pressures, while China must grapple with the challenges higher oil prices pose for its manufacturing and global supply chain dominance, despite its substantial strategic petroleum reserves and domestic production.
The impact of an oil shock on Southeast Asian economies will vary depending on the country’s economic profile and energy security situation. In some economies, it will impact household spending, manufacturing, and tourism, while in others, the effects will be felt in public finances and government budgets. Malaysia’s energy security profile is different from that of its neighbours, as its domestic production provides a buffer against energy price rises, but it is not immune to the effects of an oil shock.
What Can Governments Do to Reduce the Impact?
While countries cannot control every aspect of the global political situation, there are steps governments can take to reduce the impact of energy price shocks.
1. Diversify Energy Sources
Countries should not be too reliant on any particular fuel or supplier. A diversified energy mix and investment in efficiency and alternative fuel sources will reduce a country’s exposure to future price shocks. While solar and wind energy cannot replace every use of petroleum, a more diversified energy system will be less vulnerable to price shocks.
2. Build Strategic Energy Reserves
Strategic petroleum reserves can help to mitigate the effects of a price shock by ensuring that there is an adequate supply of fuel for a short period of time. Strategic petroleum reserves cannot prevent prolonged shortages, but they can give countries additional time to arrange alternative fuel supplies.
3. Provide Targeted Support to Vulnerable Households
Temporary and targeted support for vulnerable households can soften the impact of rising fuel prices. A universal fuel subsidy is both expensive and unfair to taxpayers. Cash transfers and food subsidies can alleviate some of the pressure without placing an undue burden on the general population or government finances.
4. Maintain Sound Fiscal and Monetary Policies
Governments should be fiscally responsible and avoid creating long-term commitments as a result of a price shock. Sound financial planning will ensure that there are funds available to help families and businesses through a price shock. Monetary authorities must be vigilant of the risk of increased inflation as a result of increased energy costs. While higher interest rates can help to control inflation, central banks must not over-react and inadvertently reduce economic growth. The IMF’s analysis reiterated the importance of support measures being carefully designed and temporary where appropriate.
5. Strengthen International Cooperation
Energy shocks are a global economic challenge and require international cooperation. Coordination is vital in emergency situations and can ensure that alternative fuel supplies can be arranged as soon as possible. International financial institutions can help to support oil-importing developing economies and ensure that they can continue to purchase essential goods and services.
Conclusion
Oil and war are inextricably linked in the global economy. A price shock as a result of a conflict in a major oil-producing region can have significant economic effects thousands of miles away. Rising oil prices can reduce a country’s foreign exchange reserves, increase inflation, business costs and reduce the purchasing power of families.
For developing and growing economies such as India, these effects can be particularly challenging due to their reliance on affordable and reliable energy to support industrialised economies and increasing populations. Increased oil prices reduce trade balances, place pressure on currencies, increase operating costs and reduce the purchasing power of families.
The lessons from recent energy shocks demonstrates that economic growth cannot be supported by the affordability of oil. Countries must take steps to build financial and energy security, diversify energy sources and provide support to vulnerable households to offset the effects of rising fuel prices.