Iran Conflict Triggers Global Energy Price Shock, Raising Inflation Risks for Asia

The ongoing conflict involving Iran is rapidly emerging as a potential global inflation trigger, as sharp spikes in oil and gas prices send shockwaves across energy-dependent economies, particularly in Asia.

Energy markets have already reacted strongly to rising geopolitical tensions. Between February 27 and March 9, 2026, global crude oil prices surged by around 51 percent, while liquefied natural gas (LNG) prices jumped nearly 77 percent. Analysts warn that if the conflict persists or escalates, the resulting supply disruptions could lead to prolonged volatility in global energy markets.

For Asian economies that depend heavily on imported fossil fuels, the crisis presents serious economic challenges. More than 80 percent of crude oil and LNG shipments passing through the Strait of Hormuz are destined for Asian markets, making the region particularly vulnerable to any disruption in Gulf energy supplies.

Several countries in the region rely significantly on Persian Gulf energy resources. Pakistan, Japan and the Philippines source more than 90 percent of their crude oil supplies from the Gulf, while India, Pakistan and Bangladesh depend heavily on LNG imports from Qatar and the United Arab Emirates.

Governments across Asia have begun implementing emergency measures to cushion the impact of rising fuel costs. These include fuel subsidies, tariff freezes for electricity consumers, and tighter monetary policies aimed at controlling inflation. While such steps may provide temporary relief to consumers, they also risk putting pressure on government finances, capital markets and utility companies.

Freezing electricity tariffs, for example, can create financial strain for power utilities that must absorb rising fuel costs without passing them on to consumers. This can lead to liquidity challenges and higher working capital requirements for the power sector.

The experience of the 2022 global energy crisis demonstrated how sudden spikes in fuel prices can create ripple effects across other sectors, including agriculture, manufacturing and transportation. Higher energy costs increase production expenses, often resulting in broader inflation across the economy.

Emerging Asian economies are considered particularly vulnerable to these shocks. Many of them are projected to experience strong growth in energy demand but lack the financial capacity to shield their economies from the volatility of global commodity markets.

The current price environment is also highlighting the economic challenges associated with gas-fired power generation. At prevailing LNG prices, the cost of electricity generated from gas-fired plants is estimated to be three to four times higher than the global average cost of electricity from solar and wind energy.

Energy analysts note that expanding renewable energy capacity could significantly reduce exposure to volatile fossil fuel markets. Estimates suggest that every gigawatt of solar power capacity installed could potentially avoid billions of dollars in LNG import costs over the long term.

Renewable energy technologies have also seen consistent cost declines over the past two decades, making them increasingly competitive compared with imported fossil fuels.

Experts argue that the latest geopolitical crisis underscores the urgency for Asian economies to accelerate their transition toward renewable energy sources. Greater investment in solar, wind and energy storage could strengthen energy security while also stabilizing electricity prices and reducing exposure to global fuel price shocks.

As tensions in the Middle East continue, policymakers across Asia are likely to closely monitor developments in energy markets. The trajectory of the Iran conflict will play a crucial role in determining whether the current price spike becomes a short-term disruption or evolves into a prolonged global inflationary shock.

Immediate exposure to the conflict depends on many factors, including the availability of oil and gas storage, long-term fuel purchase contracts, and alternative energy sources. For instance, Japan has petroleum reserves equivalent to 254 days of demand, while Vietnam has less than 20.

Most countries in Asia lack underground gas storage, exposing them more directly to price spikes in global gas markets. The Japan-Korea Marker (JKM), Asia’s LNG spot benchmark, spiked 50% between 27 February and 9 March 2026 (Figure 2). Bangladesh purchased a cargo at USD28.28 per million British thermal units (MMBtu) — nearly three times JKM prices last month — while Pakistan has halted LNG purchases altogether.

The Philippines and Vietnam began importing LNG in 2023 and purchase most cargoes from spot markets. They are therefore highly exposed to price spikes, despite only buying a small share of LNG from the Middle East.

Currency depreciation and inflation exacerbate energy price spikes

Extended price spikes for US dollar-denominated fossil fuels can cause annual import bills to skyrocket, even if demand declines. Following the Russian invasion of Ukraine in 2022, annual LNG spending in both Pakistan and Bangladesh more than doubled compared to 2021, even though imports declined by 16% and 13%, respectively. In Japan, LNG demand fell by nearly 3%, but annual spending increased 65% (Table 1).

The result is a significant drawdown in foreign exchange reserves and a depreciation of local currencies. All net oil and gas importing countries in Asia experienced currency depreciation against the US dollar in 2022 (Figure 3). In the first seven days of the Iran conflict, emerging market currencies faced their worst week since 2020, as traders flock to safe havens in gold and US dollars.

As energy prices rise and local currencies depreciate, energy imports become even more expensive in local currency terms, creating a potentially vicious feedback loop. Weak exchange rates may even persist when energy costs fall. Research by the Institute for Energy Economics and Financial Analysis (IEEFA) and Transition Zero in 2023 found that the weakening of the Pakistani rupee following the 2022 energy crisis left consumers paying high gas-fired power costs, even as global LNG prices eased.

During major inflationary “risk-off” episodes like the Iran conflict, foreign exchange and capital markets often move in tandem, tied together by investor sentiment. Higher imported energy costs raise operational expenses for local businesses, squeezing profits and equity valuations. Industries dependent on imported inputs pay in US dollars, presenting margin risks if higher costs are not passed through in the sale of finished goods. Companies with US dollar-denominated debt face rising repayments in local currency terms, potentially triggering credit downgrades.

Risks are especially significant for emerging Asian economies, which are simultaneously expected to be the largest growth markets for fossil fuels and often the least able to mitigate economic challenges when prices go haywire.

Governments in Asia are already addressing inflation risks through fiscal and monetary policy measures, along with fossil fuel supply responses. Thailand has capped diesel prices and may slash fuel taxes. China, Thailand, and some Indian refineries have halted exports of crude and refined products to shore up domestic supplies. The Philippines central bank said it may tighten monetary policy to curb inflation risks if oil prices rise above USD100 per barrel, indirectly raising the cost of debt for households, businesses, and the government.

Fiscal measures, such as costly fuel subsidies and tax cuts, provide short-term relief from inflationary shocks. But they can also restrain spending on other national priorities and lead to budget deficits, potentially elevating sovereign bond yields. Between 2022 and 2024, Japan spent JPY11 trillion (USD77 billion) on electricity, gas, and petrol subsidies to mitigate inflation caused by the Russia-Ukraine conflict.

Thailand’s Oil Fuel Fund, which subsidizes domestic fuel prices, recorded a peak deficit of -THB133 billion (-USD3.7 billion) in November 2022, with liabilities exceeding 40% of assets. Although the fund has a current surplus of THB2 billion in reserves, higher energy prices are likely to mean a return to deficit. The fund is reportedly spending THB700 million per day, and the government is preparing to secure more loans from commercial banks to boost liquidity.

Energy subsidies can also be pushed onto the balance sheets of state-owned energy companies by setting regulated end-user tariffs below the cost of fuel and power supply.

In 2022, South Korea’s state-owned utility, the Korea Electric Power Corporation (KEPCO), came perilously close to bankruptcy, as fossil fuel costs skyrocketed while end-user tariffs remained frozen to curb inflation. The company experienced an annual operating loss of KRW32.6 trillion (USD24.4 billion), and total liabilities surged above KRW200 trillion (USD153 billion). Although it narrowly escaped insolvency — through multi-year rate increases starting in late-2022, government-backed debt ceiling hikes, relaxed capital limits, and aggressive restructuring — KEPCO still faces a KRW205 trillion debt burden, soaring interest expenses, and vulnerability to future fuel price shocks that could reignite solvency concerns.

Beginning in 2021, Thai regulators also set power tariffs below the cost of generation, limiting the pass-through of higher electricity prices to end-users and causing debt at the state-owned power utility Electricity Generating Authority of Thailand (EGAT) to rise to USD4.3 billion in 2022 (Figure 4). Although commodity prices have eased, end-user tariffs remain above generation costs to help EGAT recoup deferred revenues, demonstrating the longer-term impact of price spikes on consumers.

Levelized cost metrics are often criticized for privileging renewables by not capturing the dispatchability of various technologies. However, they also overlook the extreme price volatility of LNG-fired power plants by relying on static assumptions. Actual all-in LNG-to-power prices can vary widely depending on global fuel costs, exchange rates, and plant utilization rates.

A recent IEEFA analysis of Thailand’s power markets shows the significant variation in gas-fired power prices sold to EGAT (Figure 5). Prices regularly exceed THB4 per kilowatt-hour (USD130/MWh) when plants operate at lower capacity, as fixed capacity payments are amortized over lower output. In the Philippines, the introduction of LNG in 2023 has caused a persistent increase in gas-fired power costs for Meralco, the country’s largest distribution utility, in stark contrast to the stable prices offered by solar (Figure 6).

Additionally, the levelized costs of renewables do not capture the inherent value of avoided fossil fuel import costs. IEEFA estimates that 1GW of solar capacity could potentially replace 0.16 million tonnes per annum (MTPA) of LNG demand, avoiding USD128 million in LNG imports at current prices and more than USD3 billion over the solar plant’s lifetime. While this assumes a direct replacement of LNG with solar that may be complicated in practice, competitive power markets around the world have demonstrated that zero-marginal-cost renewables will displace the highest-cost generator. In Asia, this is typically gas.

Conclusion

All the risks outlined here were on full display in the aftermath of Russia’s invasion of Ukraine. While fossil fuel prices have not reached similar levels in the first two weeks of the Iran conflict, markets are starting to brace for longer-term . Financial analysts have suggested this could be “a new global inflationary shock in the making.”

Regardless of the length of this conflict, geopolitical risk never disappears. Fossil fuel importing countries will remain perpetually vulnerable to commodity market shocks — a Sword of Damocles hanging over their economic stability. Renewable energy is not only a climate imperative; it is the only permanent solution for energy and economic security.

The writer of this article is Dr. Seema Javed, an environmentalist & a communications professional in the field of climate and energy