Pacific Money | Economy | Southeast Asia

Southeast Asia Feels the Squeeze from Middle East War

Even the region’s energy-rich countries are now being forced to reckon with the economic fallout from the Iran conflict.

Fuel storage tanks in Bangkok, Thailand.

It’s been just over a month since the United States and Israel began attacking Iran, bringing gas and oil shipments that pass through the Strait of Hormuz to a virtual standstill. Strikes on the region’s energy infrastructure have exacerbated the situation, causing price increases in everything from crude oil to jet fuel. However, the effect has been unevenly distributed across much of Southeast Asia.

Supply chain shocks can unfold sequentially over time, rather than all at once. Different countries will be affected differently depending on where they are in the chain, the extent of domestic production and reserves, and where they get their oil and gas from. I think the prevailing hope has been that U.S. President Donald Trump would end the war quickly, which seems to have tempered the market’s reaction somewhat. But in highly import-dependent countries, even short-term disruption will be painful and after several weeks of chaos in global energy markets, Southeast Asia is really starting to feel the squeeze.

The Philippines and Thailand have been two of the most exposed countries. For one, they are net energy importers. The Philippines imports almost all of its oil, making it extremely vulnerable to a sudden supply shock. Energy in the Philippines is very sensitive to market fluctuations, meaning if global prices rise, they are passed on to consumers quickly. Prices have already risen sharply.

As a result, President Ferdinand Marcos Jr. declared a national energy emergency on March 24, mandating a four-day work week for government employees and exploring other steps to try and manage the rise in prices. The declaration of a national emergency gives the government expanded powers to intervene in the market to hold prices down. How much intervention the state can or is willing to afford remains an open question, not just in the Philippines but in all countries across Southeast Asia.

Thailand is also moving more government employees to work from home in a bid to reduce demand, and has developed a contingency fuel rationing plan in case the situation worsens. The retail price of fuel is on the rise, with diesel passing 40 baht per liter to reach an all-time high on March 31. The state is absorbing some of the increase through subsidies, reportedly at a cost of around 1.5 billion baht per day ($45 million), but it may be difficult to sustain that. The government has also restricted fuel exports in order to conserve domestic supply.

This is a good example of how supply chain shocks can take a while to reverberate through trade networks. Thailand is a big refinery hub for the region, exporting $7.5 billion of refined petroleum products in 2024. With most of those exports now being conserved for the domestic market, it will squeeze countries that import Thai petroleum products further and increase upward pressure on prices. The longer this goes on, the more it will also start spreading to other sectors, such as agriculture.

For net energy importers with limited subsidy schemes, like Thailand and the Philippines, it is not surprising that they should be among the first countries to feel the impact of the crisis. But even energy-rich countries in the region, with strong mechanisms for controlling price volatility, are now being forced to reckon with the damage. In Malaysia, non-subsidized fuel prices are on the rise, but the government has kept subsidies in place for certain fuels, reportedly at a cost of 4 billion ringgit a month (nearly $1 billion). Again, it remains to be seen how long they can keep that up.

Indonesia, which has generous fuel subsidies, has also resisted raising prices. There was speculation that prices would rise on April 1, but the government announced subsidized fuel would be held steady. There will be some limits on certain types of fuel, and employees are being encouraged to work from home on Fridays. But so far, Indonesia is prioritizing price stability and the state seems willing to absorb losses to do so.

As I noted a few weeks ago, given their resource endowments and how their economies are structured, Malaysia and Indonesia have a little more flexibility when it comes to energy shocks, and they appear to be using it to buy time in the hope that the conflict will end soon. Hopefully, that strategy pays off, but all of this underscores how utterly unnecessary and damaging this has been. And until oil and gas start flowing freely through the Strait of Hormuz again, things are only going to get worse.

The United States, through this military conflict, is forcing governments throughout the region to make difficult choices about whether to stretch their budgets absorbing rising energy costs, or to let the pain fall on people and businesses. It’s a difficult choice that no government wants to be forced to make because of another country’s military adventurism. And even if the conflict comes to an end soon, as many hope, it has already inflicted real and lasting damage on the economies and people of Southeast Asia for absolutely no reason at all.

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It’s been just over a month since the United States and Israel began attacking Iran, bringing gas and oil shipments that pass through the Strait of Hormuz to a virtual standstill. Strikes on the region’s energy infrastructure have exacerbated the situation, causing price increases in everything from crude oil to jet fuel. However, the effect has been unevenly distributed across much of Southeast Asia.

Supply chain shocks can unfold sequentially over time, rather than all at once. Different countries will be affected differently depending on where they are in the chain, the extent of domestic production and reserves, and where they get their oil and gas from. I think the prevailing hope has been that U.S. President Donald Trump would end the war quickly, which seems to have tempered the market’s reaction somewhat. But in highly import-dependent countries, even short-term disruption will be painful and after several weeks of chaos in global energy markets, Southeast Asia is really starting to feel the squeeze.

The Philippines and Thailand have been two of the most exposed countries. For one, they are net energy importers. The Philippines imports almost all of its oil, making it extremely vulnerable to a sudden supply shock. Energy in the Philippines is very sensitive to market fluctuations, meaning if global prices rise, they are passed on to consumers quickly. Prices have already risen sharply.

As a result, President Ferdinand Marcos Jr. declared a national energy emergency on March 24, mandating a four-day work week for government employees and exploring other steps to try and manage the rise in prices. The declaration of a national emergency gives the government expanded powers to intervene in the market to hold prices down. How much intervention the state can or is willing to afford remains an open question, not just in the Philippines but in all countries across Southeast Asia.

Thailand is also moving more government employees to work from home in a bid to reduce demand, and has developed a contingency fuel rationing plan in case the situation worsens. The retail price of fuel is on the rise, with diesel passing 40 baht per liter to reach an all-time high on March 31. The state is absorbing some of the increase through subsidies, reportedly at a cost of around 1.5 billion baht per day ($45 million), but it may be difficult to sustain that. The government has also restricted fuel exports in order to conserve domestic supply.

This is a good example of how supply chain shocks can take a while to reverberate through trade networks. Thailand is a big refinery hub for the region, exporting $7.5 billion of refined petroleum products in 2024. With most of those exports now being conserved for the domestic market, it will squeeze countries that import Thai petroleum products further and increase upward pressure on prices. The longer this goes on, the more it will also start spreading to other sectors, such as agriculture.

For net energy importers with limited subsidy schemes, like Thailand and the Philippines, it is not surprising that they should be among the first countries to feel the impact of the crisis. But even energy-rich countries in the region, with strong mechanisms for controlling price volatility, are now being forced to reckon with the damage. In Malaysia, non-subsidized fuel prices are on the rise, but the government has kept subsidies in place for certain fuels, reportedly at a cost of 4 billion ringgit a month (nearly $1 billion). Again, it remains to be seen how long they can keep that up.

Indonesia, which has generous fuel subsidies, has also resisted raising prices. There was speculation that prices would rise on April 1, but the government announced subsidized fuel would be held steady. There will be some limits on certain types of fuel, and employees are being encouraged to work from home on Fridays. But so far, Indonesia is prioritizing price stability and the state seems willing to absorb losses to do so.

As I noted a few weeks ago, given their resource endowments and how their economies are structured, Malaysia and Indonesia have a little more flexibility when it comes to energy shocks, and they appear to be using it to buy time in the hope that the conflict will end soon. Hopefully, that strategy pays off, but all of this underscores how utterly unnecessary and damaging this has been. And until oil and gas start flowing freely through the Strait of Hormuz again, things are only going to get worse.

The United States, through this military conflict, is forcing governments throughout the region to make difficult choices about whether to stretch their budgets absorbing rising energy costs, or to let the pain fall on people and businesses. It’s a difficult choice that no government wants to be forced to make because of another country’s military adventurism. And even if the conflict comes to an end soon, as many hope, it has already inflicted real and lasting damage on the economies and people of Southeast Asia for absolutely no reason at all.

James Guild is an expert in trade, finance, and economic development in Southeast Asia.

Southeast Asia economies

U.S.-Israel war on Iran

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