Asia Faces Risk of ‘Second Energy Shock’ as Middle East Conflict Drags On

Asian economies are facing the growing threat of a second major energy shock as prolonged conflict involving Iran continues to disrupt global fuel supplies, drive up prices, and strain government finances across the region.

What initially appeared to be a short-term energy disruption has evolved into a broader economic challenge, with experts warning that Asia’s emergency defenses are weakening while inflationary pressure spreads through transportation, electricity, manufacturing, and food production.

The crisis intensified after conflict in the Middle East disrupted global energy flows and contributed to the continued closure of the Strait of Hormuz, one of the world’s most critical oil shipping routes. Governments across Asia responded by conserving electricity, prioritizing household gas supply, and drawing on national reserves.

But many of those measures were designed for a temporary shock.

Now, with no clear end to the conflict, economists warn the second wave of economic consequences is beginning to hit.

According to the United Nations Development Programme, the conflict could cost Asia-Pacific economies as much as US$299 billion and push around 8.8 million people into poverty.

Samantha Gross, an energy expert at the Brookings Institution, warned that lower-income consumers and countries with fewer financial resources will feel the impact first.

Fluctuations in gas prices in Asia (red), crude oil (light blue), gasoline in the US (orange), and European gas (dark blue), with January as the highlight (100). Source: IMF

Oil prices have become one of the region’s biggest concerns.

Many Asian governments built their 2026 budgets assuming crude oil prices would average around US$70 per barrel. Instead, Brent crude has surged to roughly US$120 during periods of peak tension.

That sharp increase is creating difficult political and fiscal decisions.

Governments must either continue expensive fuel subsidies that widen budget deficits or allow higher costs to reach consumers, risking public backlash and weaker domestic demand.

Independent energy analyst Ahmad Rafdi Endut said countries are increasingly trapped between financial pressure and political risk. If subsidies continue, governments may need to cut welfare spending or increase borrowing. If subsidies are reduced, inflation and social frustration could intensify.

India has already begun implementing emergency responses.

The government redirected gas supplies toward around 330 million households, reducing supply for fertilizer production and putting additional pressure on agriculture. Concerns over lower rainfall linked to El Niño are further increasing risks for rice production.

Prime Minister Narendra Modi recently urged citizens to buy local products, limit overseas travel, work remotely, use public transport, and reduce fertilizer consumption to conserve foreign currency and fuel resources.

Countries with weaker foreign exchange reserves are under even greater strain.

Pakistan and Bangladesh, for example, rely heavily on spot-market fuel purchases, which expose them to more volatile and expensive pricing compared with long-term contracts.

Across Southeast Asia, governments are also adjusting.

The Philippines introduced four-day work weeks for some sectors to reduce fuel consumption and expanded subsidies for lower-income households. However, Fitch Ratings warned that consumers are still facing significantly higher energy costs, slowing business activity in major cities such as Manila.

The International Monetary Fund recently downgraded the Philippines’ 2026 growth forecast from 5.6% to 4.1%, citing energy disruptions and weaker economic momentum.

Meanwhile, Thailand has already removed its diesel price cap after subsidy funds became unsustainable. The Thai government is now cutting spending in other areas to offset rising energy costs.

The economic impact is spreading beyond fuel.

Experts warn that higher transportation and electricity costs are beginning to affect tourism, remittances, manufacturing output, and consumer spending throughout Asia.

The IMF recently lowered its 2026 GDP forecast for ASEAN-5 economies—Indonesia, Malaysia, the Philippines, Singapore, and Thailand—from 4.2% to 4.1%.

Maria Monica Wihardja of Singapore’s ISEAS – Yusof Ishak Institute said the crisis is exposing how vulnerable Asia’s middle class remains during large-scale economic shocks.

Even if fighting in the Middle East ends soon, analysts say recovery will not happen immediately.

Repairing damaged infrastructure, restarting facilities, and restoring normal oil and gas supply chains could take weeks or even months.

As a result, many Asian governments are accelerating long-term discussions around energy diversification, including nuclear power, solar energy, and alternative fuel sources aimed at reducing dependence on Middle Eastern oil in future crises.