The oil shock

“THE oil shock is real, with the whole of the Middle East affected, oil and financial markets shaken, consumer prices shooting up, and several economies struggling to deal with the wider rep­ercussions of the war between US-Israel and Iran. The intersection of oil is a defining factor in the ongoing conflict that will reshape global geopolitics and economic partnerships. It is crucial to understand that the ‘oil factor’ remains a primary strategic lever in determining the duration, intensity, impact and the eventual outcomes of this conflict. The most significant link is the Strait of Hormuz. Approximately 20 per cent of the world’s oil and 19pc of its liquefied natural gas pass through this narrow waterway. The closure of vessels and the blockade of the Strait of Hormuz have caused the largest disruption to oil supply in history. While it has heightened global uncertainty and inflationary pressures, the Gulf countries are the hardest hit, with infrastructure damage, insecurity, economic losses and rising political tensions. Most Gulf countries have seen a sharp price hike in basic commodities, as merchants are forced to airlift groceries because 80pc of their food supplies were coming through the Strait of Hormuz. The world has also understood that an attack on Iran cannot remain isolated and has serious global economic consequences. The war has also exposed Asia’s extreme dep­e­ndence on Middle Eastern energy resources (75pc of Gulf exports go to Asia). Countries such as China, Japan, India and Pakistan will have to aggressively revamp their energy mix by increasing the share of nuclear, coal and renewable ene­rgy options. While Pakistan attempted to mediate a ceasefire, the subsequent collapse of those talks led to a renewed ‘risk premium’ in oil prices. At the end of the day, it is ordinary consumers who are paying a huge price for the impact of war. Pakistan has witnessed a historic increase in fuel prices during the past three months. As of May 9, 2026, Pakistan has faced a massive surge in fuel prices, with petrol rising by over 42pc and diesel by nearly 55pc in recent sudden hikes. This is putting huge pressure on maintaining a fragile macroeconomic stability under the IMF programme . The chronic macroeconomic imbalances have severely hit Pakistan’s global competitiveness, with serious implications for job creation, the exchange rate, and overall productivity. The recent increase in oil prices will further weaken the export competitiveness due to a sharp increase in the cost of doing business. As a result, the country will face the challenges of a widening trade and current account deficit, as well as pressure to devalue the Pakistani rupee. The business community has warned that these prices are ‘paralysing’ industrial growth. The impact is felt across the board. Firstly, logistics and transportation costs are affecting supply chains. Diesel is the backbone of the country’s transport fleet. With prices above Rs414 per litre, goods transport fares have already risen by an estimated 20pc. Every product, from raw materials to finished goods, now carries a higher ‘transit tax’ as companies pass on freight costs to the end consumer. This leads to a serious policy question: why has Pakistan not developed a rail-based internal trading system, which could not only have saved on transport costs by using other fuels but would also have improved efficiency and predictability? Secondly, many industries (textiles, cement and steel) use diesel-powered generators to offset power outages or to bridge energy gaps. The fuel hike directly increases the per-unit production cost. Again, there has been a clear policy failure to encourage solar energy in the industrial sectors. Thirdly, agriculture contributes significantly to GDP and relies on diesel for tractors, tube wells and harvesters. The closure of the Strait of Hor­m­­uz has caused urea fertiliser prices to surge by over 50-70pc following the outbreak of conflict. This is expected to trigger a fresh wave of food inflation. Fourthly, Pakistani exporters are finding it increasingly difficult to compete with regional peers such as India or Vietnam. High inland freight costs and energy tariffs are making Pakistani products too expensive for the international market. With inflation projected to stay in the 9-13pc range due to energy costs, the State Bank of Pakistan is likely to maintain high interest rates, making business loans and expansion more expensive. At the end of the day, it is ordinary consumers who are paying a huge price for the impact of war, due to a perpetual policy failure to mitigate unforeseen risks, the government’s poor public finance priorities and the unlimited greed of elites to maintain their lavish lifestyles at the cost of the poor. The fuel hike in an import-dependent economy is rapidly eroding the purchasing power of the majority of the population, which falls into the middle-income bracket or below the poverty line. The cascading effect of the ongoing conflict will be hard felt in Pakistan due to a potential decline in remittances from the Gulf countries and a repressive indirect taxation system to run the affairs of the overstaffed and inefficient state machinery. Historically, Pakistan has failed to translate its geopolitical and diplomatic positioning into a strong, sustainable economic base that can leverage its natural comparative advantage to provide decent livelihood opportunities to a population of almost 250 million people. Will it be different this time with a visibly progressive policy shift towards energy transition, demand management and the opening up of alternative supply sources? Perhaps it is expecting a little too much from the old school policymaking mindset that has led to the current economic vulnerabilities. The writer is a global expert on development and economic policy. He served as minister of state for investment and has held top-level positions in multilateral and government institutions. Published in Dawn, May 16th, 2026

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