The Gulf war will change Asia for good

What Narendra Modi asks of Indians, he usually gets. During the pandemic India’s prime minister exhorted them to stay inside and to bang pots and pans in support of health workers. The country obliged. On May 10th he asked Indians to replicate some of that covid-era discipline. He urged them to work from home where possible, and to cut back on foreign travel.

Mr Modi’s plea comes amid a worsening energy shock caused by the war in Iran. For weeks the Indian government has kept fuel prices constant, forcing state-owned oil firms to absorb a surge in the cost of imported crude. And India is just the latest of many Asian countries asking people to tighten their belts. But even those that moved early to control energy use, such as Thailand and the Philippines, are now entering dangerous territory. The effects of the war are threatening to upend the region’s economies—and its politics.

In places without fuel-price caps, such as Pakistan and the Philippines, prices have soared (see chart). But the rising concern, especially in developing Asia, is that supplies could simply run out. Indonesia is reported to have a buffer of three weeks’ fuel; Vietnam has less than a month. People in Pakistan and Bangladesh, reliant on natural gas from the Gulf, have endured long blackouts. Petrol pumps in rural areas are running dry. “We wake up at 2am and often wait 24 hours just to get two litres of diesel,” says Mizanur Rahman, a farmer in Bangladesh.

Mr Rahman’s plight points to the pain being suffered by agriculture, in particular. As well as diesel, farmers are running short of fertilisers. The price of urea, much of which is made in the Gulf, is up 50% since the start of the war. Millions of rice farmers in Asia have begun planting paddy but are now scaling back plans because of the cost. “Right now rice is a profitability problem,” says Dr Alisher Mirzabaev of the International Rice Research Institute in the Philippines. “But if the war continues, it becomes a food-security one.”

Manufacturers are panicking, too. Textile factories in Bangladesh account for around 13% of GDP. Bosses say input costs are up by 10-15%, because of costlier diesel and petrochemical-based dyes. The country’s overall factory output is down by around 30-40%, says an industry body. Calbee, a snackmaker in Japan, has rolled out black-and-white packaging to offset the rising cost of naphtha—a petrochemical feedstock largely sourced from the Gulf. The scarcity of naphtha has already forced several Asian plastics producers to declare force majeure on their contracts.

Inflation in the Philippines jumped to 7.2% in the year to April; GDP growth in the first quarter of 2026 slowed to 2.8%, the lowest since the pandemic. It is a harbinger. The UN thinks a prolonged war could shave up to 3.6% from GDP in South Asia. Food-price inflation in India, Pakistan and Sri Lanka this year could exceed 10%, says the Kiel Institute, a German think-tank.

All this is battering government finances. It is costing India roughly $150m a day to keep fuel prices steady. The government may also spend around $4.3bn on subsidies for fertiliser during planting season. Indonesia is spending around $60m a day on energy subsidies. Holding pump prices flat with crude at $100 a barrel would cost Asian governments around 1% of GDP a year, according to the Centre for Global Development, a think-tank in Washington.

Few Asian countries can keep this up. But letting prices rise is fraught. Farmers in India expect the government to keep subsidising fertilisers (despite Mr Modi’s plea to cut usage in half). Previous attempts by Mr Modi to reform agriculture have been thwarted by mass protests. Across Asia, officials worry that rising prices will trigger disorder of the sort that toppled Sri Lanka’s government in 2022. Since the war in Iran began, dozens of protests have erupted in Pakistan, Bangladesh, the Philippines and even in South Korea, according to ACLED, a monitor based in America (see chart 2).

As well as encouraging less use of fuel and other consumables, governments are hunting out alternative supplies. That could have consequences that last long after the war has ended. Thailand has been buying more oil from places such as Brazil and Libya. Asian countries are making more use of biofuels. Some, such as Singapore, are investing in renewables.

Some Asian countries are benefiting from this scramble. Australia, a big coal and natural-gas exporter, is stepping up purchases of refined fuels in exchange for shipping more of its natural resources. It has secured new deals with Brunei, Japan, Malaysia, Singapore and South Korea. Another relative winner could be China. It not only stands to sell more solar panels and wind turbines, but is also wielding influence through its fossil fuels. Despite being the world’s biggest importer of crude, the country sits on vast oil reserves, giving it big buffers and diplomatic clout.

This month China allowed refiners to ship some petrol, diesel and jet-fuel cargoes abroad, easing a ban imposed earlier in the war. Reports suggest the first shipments will head to Vietnam and Laos, which have friendly relations with their northern neighbour. But even American allies have come calling. On April 29th Penny Wong, Australia’s foreign minister, secured a deal for jet fuel on a trip to Beijing.

Indeed, plenty of Asian countries now see opportunity in drawing closer to one another. At a recent summit in the Philippines, South-East Asian leaders talked of creating a shared fuel stockpile. And on May 3rd the Asian Development Bank pledged to mobilise $50bn by 2035 to help stitch together Asian power grids. This could cut prices and boost energy security. It “would have made the last two months a lot easier”, says Eugene Toh from Singapore’s Energy Market Authority.

Asian governments have long been wary of sharing their electricity, and fearful of any system that might give next-door countries control of their supplies. Yet now that they are hostage to events thousands of miles away, the squabbles that frequently break out between Asian neighbours no longer look quite such a threat. ■