Southeast Asia seeks to diversify energy supplies as Middle East conflict weighs on economies
The conflict in the Gulf has left Southeast Asia economies reeling as a result of their heavy dependence on energy imports from the region. Governments have acted quickly to try and find alternative suppliers, but the combination of fuel shortages and higher prices will hit nearly every sector of local economies. Even if the war comes to a swift end, the region stands braced for lower economic growth and higher inflation this year as Adrian J. Ashurst, CEO of Worldbox Business Intelligence outlines below. 1
The conflict in the Middle East has had a significant impact on Southeast Asia overall, although the severity of that impact varies across the region. The Iranian threat to the Straits of Hormuz and the blockade of the Straits subsequently implemented by President Trump has choked around one third of global gas and oil supplies. However, the effect on Southeast Asia, which is heavily dependent on energy supplies from the Middle East, is more dramatic than that figure suggests, as highlighted below.
Table 1: Southeast Asian Dependencies on Oil and Gas from the Middle East
Source: Yusof Ishak Institute
Farmers hit by double whammy of higher energy costs and fertiliser shortages
Fuel shortages are already affecting the region. In late March, for example, long queues at petrol stations appeared in many areas of Thailand despite government claims that it held 100 days of supplies. The economy is already experiencing significant disruption. Thailand is one of the world’s biggest exporters of rice, sugar and canned and processed fish. Farmers have been unable to procure diesel to power the machinery needed to harvest crops, and many fishing vessels reman anchored in port. 2 It is a similar story in the Philippines where hundreds of fuel stations have shut down with the government declaring a national emergency to address the energy shortage. It is not just the fuel shortages that are affecting farmers. Many Filipino farmers are letting their crops rot because the rising cost of fuel is driving up the cost of harvesting, labour and transport. 3
Moreover, shortages of fertilisers are also hurting farmers. The Persian Gulf is the source of around 35-45% of world fertiliser supplies. Fertiliser makers in Malaysia have already suspended new orders as the Middle East conflict drives up raw material prices. The Guardian points out that unlike oil, the fertiliser sector does not have internationally coordinated strategic reserves, which makes supply chain disruption even harder to manage. The UN’s Food and Agriculture organisation (FAO) has warned of a “major shock” to global food systems. The World Food Programme has predicted, for example, that war-torn Myanmar could see food production costs double compared with last year’s harvest.
Tourism, a key contributor to economic growth in many countries, is another affected area. In Thailand, where tourism generates up to 20% of GDP and millions of jobs, the impact of higher air fares is already being felt with some operators reporting a 50% drop in income. 4 Officials have warned that if the conflict lasts six months, Thailand could see three million fewer foreign tourist arrivals this year, a decline of around 10%. 5
Higher energy prices hit manufacturing
Manufacturing costs are also rising across the region. The Straits Times, cites the example of Singaporean soya sauce maker Thomas Pek, which has seen the price of bottles and bottle caps rise sharply since oil is a key material in their manufacture, with production and transport costs also surging on the back of higher diesel prices. The company has been absorbing the higher soya sauce bottle and cap costs, which rose 8% in March and by another 15% in April, but may have to raise prices by up to 15% from May, as the higher production costs persist given it could take years to repair all the damaged infrastructure in the Middle East. 6
Across the causeway in Malaysia, the Small and Medium Enterprises (SME) Association of Malaysia is warning that the sharp increase in the price of diesel is already disrupting cash flow across the SME ecosystem, particularly in logistics and manufacturing. Prof Dr Nanthakumar Loganathan of Universiti Teknologi Malaysia says ripple effects will extend across manufacturing and services. Nanthakumar added that Malaysia’s heavy reliance on diesel-powered transport, particularly heavy goods vehicles, meant no sector would emerge unscathed and that businesses have limited ability to absorb rising costs due to a lack of alternative energy options. On the demand side, higher prices for essential goods will erode purchasing power, particularly among low- and middle-income groups. 7
In Indonesia, the government is determined to withstand the impact of surging global oil prices through to the end of 2026 without cutting fuel subsidies. As a net oil importer, Indonesia continues to maintain energy subsidies covering 30–40% of fuel prices, accounting for more than 5% of the state budget, a policy that began back in the 1960s under President Suharto as a means of protecting the very poor and maintaining political stability. 8 S&P Global Ratings reported in April that sovereign ratings in Southeast Asia, particularly Indonesia, are under risk due to the Middle East conflict. However, the agency added that the Indonesian government's response to the energy disruption may contain some of the damage to its fiscal performance. S&P explained that while the authorities have maintained the subsidized fuel prices, spending on the free nutritious food programme has been cut. At the same time, higher commodity prices could also boost government revenue.
Looking for alternatives
Southeast Asian countries have responded swiftly to the conflict seeking alternative suppliers in addition to taking measures to cushion the impact domestically. Indonesia, the Philippines and Thailand are seeking to increase energy imports from Russia and the US, while the Philippines is now considering joint oil exploration with China. 9 Countries are also looking to Colombia and Argentina, as well as Canada. Russia’s civilian nuclear power industry also stands to benefit. Vietnam has already ordered two nuclear reactors from Russia. 10 Some countries are also turning back to coal. Thailand has ordered the reactivation of two decommissioned units at the Mae Moh coal-fired power plant in Lampang province and has extended the operation of existing coal-fired units at the 2,400-MW Mae Moh plant, with some expected to run until 2031 and others refurbished to operate until 2048. The Philippines also plans to boost operations of its coal-fired power plants and is seeking to maximise the use of local coal, while also potentially increasing purchases of coal from Indonesia. Jakarta has reversed its decision to cut back coal output and is now planning to increase production to capitalise on higher global prices as a result of the Persian Gulf war.
Even if the war ends soon, the economic fallout will cast a shadow over the rest of the year. Economic growth in nearly every country in the region - apart from energy-rich Brunei - will be one or two percentage points lower than would otherwise be the case. The reflects the impact of falling domestic and external consumption as higher energy prices fuel inflation across the board and squeeze disposable incomes with the poor the worst hit. Lower growth will squeeze government revenues and potential spending plans while corporates are likely to cut back capex as they cope with higher input costs in an increasingly competitive marketplace as consumers look for the best deals or postpone spending.
Sources
2. https://www.theguardian.com/world/2026/mar/27/thailand-petrol-price-rising-farmers
4. https://news.cgtn.com/news/2026-04-13/VHJhbnNjcmlwdDkwMTEz/index.html
9. https://fulcrum.sg/the-war-against-iran-and-the-fragility-of-southeast-asias-energy-responses/
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