How war in the Middle East is hitting Asia hard

A glimmer of hope emerged in week four of the war, with reports of talks between the US and Iran initially pushing Brent below US$100/bbl. Time will tell if this marks a turning point for the crisis or if the constraints on Gulf exports are prolonged and push prices higher.

The importance of oil and the sensitivity of the global economy to price can’t be overstated. Wood Mackenzie analysis suggests that a scenario of Brent averaging US$125/bbl through 2026 will lead to a global recession, a view broadly echoed this week by Blackrock CEO Larry Fink. No economy is immune to the fallout of sustained, high crude prices, but some are impacted more than others. The major oil-importing countries of Asia are among those feeling the pain most acutely.

The region's governments have rapidly deployed an unprecedented array of cushions to protect the hardest-hit sectors and consumers. But such interventions come at a staggering cost and, if oil prices remain high, some Asian governments will soon hit fiscal breaking point. Our Asia experts, Yanting Zhou, Sushant Gupta and Joshua Ngu, guided me through the economic and political challenges. 

Why are Asian economies so strategically vulnerable to this conflict?

Asia’s dependence on Middle Eastern oil is a long-established structural reality. Before the war, around 80% of the crude that passed through the Strait of Hormuz was delivered to Asian refineries. Japan and South Korea sourced more than 90% and 70%, respectively, of their oil imports from the Gulf before the outbreak of the war. China and India, the world’s two largest oil importers, have actively diversified their supplies to include Russia and the US but still depend on the Middle East for around half their crude supplies.

Developing economies across Southeast and South Asia, where economic growth typically depends on manufacturing and exporting goods, are particularly vulnerable. Most have limited foreign currency reserves to pay for soaring oil import bills. In 2026, the “war premium” is no longer a theoretical risk but will hit national balance sheets hard.

How are Asian governments responding?

They’re trying to prevent a repeat of the 2022 cost-of-living crisis. Beyond demand-side management, Asian governments have shifted from market pricing for oil products to aggressive intervention. A plethora of policy responses are being rolled out across the region. Most, though, amount to pretty much the same thing – subsidies for consumers.

Price caps at the pump are the go-to lever, with governments compensating losses through a variety of mechanisms. In Indonesia, losses by national oil company (NOC) Pertamina will be recovered by government compensation later; Japan and Malysia have a similar scheme for their refiners and fuel suppliers. In Thailand and Vietnam, oil company losses are currently made good from dedicated funds – though the longevity of these funds is already being tested. China, meanwhile, has a US$130/bbl crude price ‘cap’ on refined product prices that refiners can pass through to customers. Perhaps in anticipation of higher prices, China introduced subsidies on diesel and gasoline this week despite the cap not being breached.

India has a twist on the theme. The government moved fast to freeze retail prices but the state-owned oil marketing companies initially have to absorb the losses. Once these become unsustainable, the central government intervenes by cutting taxes, essentially sacrificing tax revenue to keep the pump price stable.

How sustainable are fuel subsidies across Asia?

Collectively, fuel subsidies will be a huge cost to governments. If oil remains at US$100/bbl for four months, we estimate Asia’s total subsidy bill will exceed US$80 billion. In a higher-for-longer scenario, as well as demand destruction, the economic pain multiplies, impacting fiscal deficits, balance of payments and perhaps credit ratings.

The affordability of current subsidy schemes varies greatly by country. Thailand and Vietnam have tapped into budget rainy-day funds to make subsidy payments. But Thailand’s fund is already in deficit, while Vietnam’s will be fully drawn by early April under the current subsidy scale.

Expanded fiscal deficits look near-certain through 2026 across much of Asia. If Brent averages US$100/bbl for four months, India is hit hardest among Asia’s major economies: we estimate a cost equivalent to 0.7% of GDP and 7.2% of government revenue in fiscal year 2025-26. Indonesia is in danger of breaching its legal limit of 3% on its fiscal deficit if subsidy payments persist.

Even those governments not facing near-term funding challenges for subsidies, the burden of a higher fiscal deficit may haunt budgets for several years to come. Currency depreciation for these energy importers may exacerbate the debt issue.

Where next for Asia’s challenge in dealing with high prices?

Conflict escalation is clearly a nightmare scenario for Asian economies. Brent averaging US$125 in 2026 would see the global economy crash into recession and do massive damage not only to Asian markets but also their key export markets worldwide.

For Asia and the rest of the world, the modest drop in oil prices these last few days is hugely welcome. But a lasting ceasefire and the return of laden oil tankers transiting the Strait of Hormuz is what really matters.

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