Gulf War Disruptions Trigger Energy Crisis for Developing Nations

The ongoing conflict in the Gulf region is causing significant disruptions to global energy supplies, disproportionately impacting low-income and developing countries. The closure of the Strait of Hormuz, a critical waterway for oil transport, has led to energy shortages and economic strain in several nations, echoing patterns observed following Russia’s invasion of Ukraine in 2022.

Strait of Hormuz: A Vital Chokepoint

The Strait of Hormuz, located between Iran and the Musandam Peninsula (shared by the United Arab Emirates and Oman), is a narrow passage through which approximately 20% of the world’s liquefied natural gas (LNG) and 25% of seaborne oil trade passes annually [Wikipedia]. Its strategic importance makes it a key vulnerability in the global energy supply chain. Although approximately 90 ships, including oil tankers, have traversed the strait since the start of the war, many are engaging in “dark” transits to evade Western sanctions [AP News].

Vulnerability Ranking of Developing Countries

A country’s vulnerability to this energy crisis is determined by its exposure to energy imports and remittances from the Gulf region, as well as its financial capacity to absorb shocks. Here’s a breakdown of the risk levels for several developing nations:

Highest Risk

• Jordan: High exposure coupled with a limited financial cushion, though diplomatic ties may secure emergency support.
• Pakistan: Allocates around 4% of its GDP to oil and gas imports, 90% of which reach from the Middle East. Similarly reliant on remittances from the Gulf, representing 5-6% of GDP. Currently, Pakistan’s foreign exchange reserves are below IMF recommendations.
• Egypt: Spends approximately 3% of GDP on energy imports, with nearly half sourced from the Middle East. Like Pakistan, it depends on Gulf remittances (5-6% of GDP) and has a limited financial cushion.

Vulnerability in South Asia

• Bangladesh: Faces high risks due to weak financial cushions despite medium exposure levels. Foreign exchange reserves cover less than three months of import needs. The garment sector, a key export industry, is heavily reliant on imported fuel.
• Sri Lanka: Also vulnerable due to limited reserves, having recently recovered from a default in 2022 triggered by previous energy price shocks.

High Exposure with Better Resilience

• Thailand: Spends about 7% of GDP on oil and gas imports but possesses strategic oil reserves for 100 days and sufficient foreign exchange reserves to cover over seven months of imports.
• Nepal: Highly reliant on remittances from the Gulf (8% of GDP), but has strong enough foreign currency reserves to withstand the initial shock despite minimal oil reserves.

India’s Position

India is considered well-positioned to manage the shock, spending 3% of GDP on energy imports and maintaining foreign exchange reserves sufficient for seven months of imports. Its refineries can process lower-grade crude oil, and power generation relies heavily on domestic coal [CBS News].

Indonesia’s Resilience

Indonesia is ranked 13th among emerging markets most exposed to the oil crisis, with high net imports from the Middle East. However, it possesses a relatively strong buffer compared to other nations.

Threat of a Food Crisis

Beyond the macroeconomic risks, the energy shock threatens food security. The price of nitrogen fertilizer, produced using natural gas, has surged, increasing food production costs in vulnerable countries. The World Food Program (WFP) projects a record number of people facing acute hunger by 2026 if the conflict continues.

Securing import financing and stabilizing currency exchange rates may mitigate a financial crisis, but maintaining food affordability remains a significant challenge.