The geopolitics of fuel

When conflict closed the Strait of Hormuz in early 2026, the economic consequences did not arrived in the Pacific overnight. But they did arrive within weeks. Kerosene prices rose 42%. Diesel climbed 35%.

For governments already carrying rising debt burdens, with average debt servicing costs that often exceed 40% of government revenue, the arithmetic was brutal: fuel imports consuming up to a quarter of national income, foreign reserves declining, and no short-term path to relief.

Unlike larger economies, Pacific Island governments cannot print money, cannot absorb repeated import shocks on thin fiscal buffers, and cannot wait for global oil markets to stabilise. The Middle East may be thousands of kilometres away, but the damage has been almost immediate, and hyper-local.

This is not a new vulnerability. It is a structural one, and the Pacific has already begun building the answer. Research by the United Nations Development Programme (UNDP) and the University of New South Wales, published in 2025, documented what community-centred renewable energy transitions look like when they work: locally owned, locally maintained, and deliberately designed to sever the connection between Pacific households and the geopolitical shocks that have always determined whether their lights stay on.

The question that the pre-COP meeting in Fiji and Tuvalu this October must now answer is whether the finance exists to scale that answer before the next crisis makes it unavoidable.

In an era defined by volatility, the smartest economic decision may not be securing more fuel – but needing less of it.

The answer is already being built. Renewable energy deployment is accelerating rapidly, with approximately 85% of new power generation globally coming from renewables in 2025. The International Renewable Energy Agency has noted consistent declines in the cost of renewable technologies. In remote Pacific Island communities, small-scale solar systems are beginning to change the economics of everyday life.

In Fiji, solar mini-grids are being implemented through the Fiji Rural Electrification Fund (FREF) project, led by the Government of Fiji with support from UNDP. The model combines public finance with private sector delivery to extend reliable electricity to remote communities. Where diesel generators once dictated limited hours of expensive, unreliable power, communities are starting to access 24-hour electricity generated locally from the sun.

For households, this means cheaper and more consistent energy over time – in Fiji, solar generation costs are around eight times lower than current grid electricity tariffs. For local businesses, it also enables longer operating hours, refrigeration, and new productive uses of energy. And for governments, it reduces exposure to fluctuating fuel import bills that can strain national budgets. This approach aligns with the Pacific’s ambition to be the first region in the world to be 100% powered by renewables.

Seen through this lens, the case for solar mini-grids is not only environmental – it is economic. Diesel prices are volatile, and freight costs to remote islands add to already high fuel prices – with fuel imports costing between 10–25% of GDP in some Pacific nations. Supply is equally precarious, dependent on shipments that can be delayed by weather, port capacity, or – as recent Middle East conflict has shown – global disruptions. Solar, by contrast, carries near-zero fuel costs once installed, generates power daily without waiting for the next supply ship, and shields communities from the geopolitical shocks that routinely ripple through global oil markets. Following upfront investment, replacing diesel generators with solar PV and batteries would save the Pacific well over US$400 million annually.

This fundamentally changes the cost equation. For governments managing constrained budgets and rising fuel import bills, this suggests a shift in how value is assessed – not only in terms of upfront cost, but long-term system performance and risk. What was once seen as a costly alternative is now the lowest-cost option.

The Pacific’s experience offers an opportunity to reframe the energy conversation as global leaders meet in Fiji and Tuvalu for pre-COP31 dialogue in early October. Climate finance will rightly be a central focus, but beyond financing gaps, there is an opportunity to highlight the economic gains and fiscal resilience possible through a transition away from fossil fuels and toward renewable energy for households, business and governments.

The FREF model demonstrates that, with the right upfront investment and strong public-private partnerships, this transition is not only viable but increasingly represents sound economic policy. This model is ready to be scaled across other Pacific Island countries, including Tuvalu and Marshall Islands, which face acute energy challenges, and Solomon Islands, which has one of the highest energy tariff rates globally with consumers paying up to 19 times more than the cost of solar power. The FREF model could be applied to other countries beyond the region.

In an era defined by volatility, Pacific nations are have shown that the smartest economic decision may not be securing more fuel – but needing less of it.

The FREF project has received funding from the governments of Fiji, Australia, New Zealand, the United Kingdom.

For decades, the metric of success for the “Asian Miracle” has been the frantic movement of goods: the “just-in-time” supply chains, the burgeoning export volumes, and the rising GDP figures. But the war against Iran has stripped away these secondary layers of economic prestige. We have learned that if a nation cannot power its factories or feed its people, its “miracle” is merely a borrowed illusion. In the present crisis, energy and food security are no longer just line items in a budget, they are the very definition of national sovereignty.

The escalation of the conflict since 28 February has effectively imposed a “friction tax” on the regional economy. For years, Asia’s “world’s workshop” model relied on the assumption that energy and transport costs were negligible. That assumption died the moment the Strait of Hormuz closed. Because Asia consumes 38% of the world’s oil and 24% of its gas – 80% of which must pass through that single chokepoint – the region is more exposed than any other to the weaponisation of distance.

The most dangerous misconception is that energy and food are separate silos. In reality, they are a single, connected system. In the rice-farming heartlands of Cambodia, Myanmar, and Vietnam, energy is food. Diesel powers the irrigation pumps and the tractors; natural gas is the primary feedstock for urea and ammonia fertilisers.

A country can survive a dip in semiconductor exports, but it cannot survive a hungry populace.

When the Oman crude benchmark spikes, it doesn’t just hit the petrol pump but also the dinner table of Asian countries. Rising oil price shocks directly drive up agricultural food costs, with research indicating that energy market movements explain over 64% of the variance in food prices. This dependency demands diversification of energy sources within the agricultural sector to reduce the harmful effects of oil-led inflation.

The World Bank warns that disruptions to fertiliser trades are already fanning food price inflation across South Asia, where agriculture still accounts for up to 20% of GDP. This is why food security is the ultimate test of resilience: a country can survive a dip in semiconductor exports, but it cannot survive a hungry populace. The World Food Program warns that rising food and fuel prices could worsen global hunger among vulnerable populations.

The rising fuel and food crisis also represents a productivity trap. As the cost of essential inputs (fuel and fertilizer) outpaces the gains in output, the “friction” of production erases profit margins for small-scale farmers and global tech giants alike. Governments are currently attempting to subsidise their way out of this trap. Malaysia and India are spending billions to shield consumers, but these are quasi-fiscal gambles that erode the buffers needed for long-term survival. Governments cannot subsidise the physical absence of a fertiliser shipment or a tanker of Liquefied Natural Gas (LNG). By muting price signals, these measures forestall the only practical solution: a radical pivot toward domestic energy and food autonomy.

To safeguard Asia’s economic ascent, policymakers must move beyond the rhetoric of “political will” and commit to hard structural integration that addresses the region’s fundamental vulnerabilities. This begins with a “Proximity Pivot” to shorten the distance between energy processing and value creation. Rather than relying on fragile, transoceanic shipments of finished inputs, this model requires relocating refining and fertiliser production to the same sub-regional clusters as the farms and factories they serve.

The viability of this pivot is demonstrated by Vietnam’s Ca Mau Gas–Power–Fertiliser Complex, which has already supplied 11 million tonnes of fertiliser and 116 billion kWh of electricity, securing the Mekong Delta's agricultural backbone. This “localised-integrated” model, treating energy and food as a single, protected infrastructure, is gaining traction as nations seek to decouple survival from maritime chokepoints. Similarly, India’s national coal gasification mission in Odisha aims to reduce reliance on imported methanol by 90% by emulating China, the leader in gasification. Utilising inland resources can effectively bypass the “friction tax” of global spot markets.

Simultaneously, the regional safety net must be modernised by allowing vulnerable nations such as Nepal and Laos to repurpose a portion of multilateral loan portfolios toward “sovereign infrastructure”, including micro-grids and domestic food reserves, priortising domestic consumption. This builds upon the logic of the World Bank’s shift toward a 45% climate finance target for 2025–26, providing immediate fiscal space to protect local populations from global market volatility.

The 2026 shock has laid bare the fragility of a region that grew too fast and looked too far for its basic needs. The lights are flickering in the “world's workshop” because we forgot that the workshop was built on the back of imported stability. True resilience doesn’t come from a high GDP; it comes from the certainty that the tractors will run, and the bowls will be full tomorrow morning.

New Zealanders have long bemoaned the fact that their juiciest produce leaves on a ship. Export-grade beef, world-class dairy, priced accordingly for Dubai and beyond, not Tauranga. The running joke is that you must go offshore to get a taste of home.

The export model has always relied on distance being manageable and markets remaining open. The Strait of Hormuz is now testing that approach and stretching New Zealand’s cold storage infrastructure.

Since February 2026, the closure of the strait has sent an icy breeze through New Zealand's export-dependent food sector and shivers up the spines of executives. Containers of chilled meat destined for Gulf markets are being rerouted or returned home. In March, Fonterra's CFO flagged the knock-on effects of prolonged disruption and the Meat Industry Association has warned that chilled exports worth NZ$166 million are at risk.

Timing makes this worse. A wet summer has pushed processing season back, so domestic volumes are still building. Also in March, Rick Walker, ANZCO's general manager warned, “We are trying to be proactive preparing for a situation where we may be required to hold additional inventory here in New Zealand because we do not have the containers we need.” One unnamed director of a major meat company put it more starkly in a comment to agricultural news publication Farmers Weekly: “You might find a lot of meat companies will run out of working capital before they run out of storage space.”

Farmers may sit at the start of the production chain, but they are often at the end of the financial one, with the least capacity to absorb delay.

Returning containers, cool stores steadily filling and processing plants near capacity, and a farmer cashflow squeeze – all condensing while political attention is consumed elsewhere, in leadership contests, election positioning, and weather challenges. With a general election set for 7 November and the economy fragile, each of the key political players may want to cast an eye to the horizon – a perfect storm may be heading their way.

When logistical pressure moves quickly, the financial pressure is never far behind. From cool store to processing plant to farm gate to balance sheet. Farmers may sit at the start of the production chain, but they are often at the end of the financial one, with the least capacity to absorb delay.

By the 1980s, New Zealand had already built the largest refrigerated storage volume per capita in the world. This infrastructure was engineered for one-directional flow at scale, not for holding inventory when global routes seize or reverse.

The Covid pandemic and the Suez Canal being blocked by a container ship have tested the model, meaning this latest exposure is not new, and there may well be a contingency available this time that could be applied.

Rule 8 of New Zealand's Government Procurement Rules – updated in December 2025 as part of a broader move to simplify and modernise the framework – requires all mandated agencies, from hospitals and schools to public service departments and the Defence Force, to give at least a 10% weighting to economic benefit for New Zealand in every procurement decision. The Rules also contain emergency provisions that allow agencies to bypass routine tendering when supply chain disruption reaches a defined threshold. Taken together, these settings give government far more room to manoeuvre than is currently being used. The flexibility is already built into the system. Less clear is whether political leaders have recognised it, let alone considered activating it in a moment like this.

If the procurement framework were activated, export-quality New Zealand beef and dairy could flow into public institutions – not as charity or subsidy, but through an existing mechanism. Trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) preserve space for public interest procurement in areas such as health and food security. This is less about inventing a new policy response than recognising and using the one already available.

Forward planning is what governments are elected to do, to anticipate pressure points and respond in line with national priorities. When a farmer faces a cashflow squeeze because a system cannot flex, that is not only an economic issue. It is a question of how the system distributes risk.

The Strait of Hormuz may be thousands of kilometres away, but its effects are now visible in Waikato and Canterbury. When high‑quality food sits in a cool store while domestic need exists, the question becomes whether the system is capable of adjusting in real time. Somewhere in that inventory – and in Rule 8 – lies a contingency that could ease pressure further up the chain, and finally let New Zealanders have a taste of their juiciest product without leaving the country.

Japan is testing a new approach to development cooperation that favours short-term dynamism over long-term stability.

The last 12 months saw the biggest ever drop in the amount of money governments devote to Official Development Assistance (ODA) – down a quarter globally. Japan’s cuts to foreign aid have been more modest than many of its peers. In real terms, its net ODA flows fell by more than US$5 billion, or 27%, between 2023 and 2025 – a smaller drop than the United States (57% over the same period) or Germany (39%). However, the composition of Japan’s aid portfolio stands out for its high use of concessional loans rather than grants, making it arguably less generous but more financially sustainable.

Tokyo recently announced $10 billion in financial assistance for developing Asian countries to tackle the energy crisis sparked by the Iran war. The package was staggering for its size – a mix of grants, concessional loans, private sector instruments, subsidies and export credits, mobilised to facilitate emergency procurement of crude oil and petroleum as well as invest in stockpiling and storage systems.

That commitment alone is more than double Japan’s annual spending in Southeast Asia in previous years, as shown by the Lowy Institute Southeast Asia Aid Map. And it responds directly, and swiftly, to an urgent and even existential crisis for Southeast Asian governments. Development cooperation, beyond provision of humanitarian assistance, is often criticised for being too slow in orienting to shocks and structural changes in the developing world, but Japan has successfully deployed a large-scale support mechanism within weeks of the onset of the energy crisis.

The cost of that speed will be felt in the long term. The $10 billion package doubles down on fossil fuels, with a passing reference to “diversifying energy sources” the only sign of clean energy investment. Development finance for renewable energy in Southeast Asia is at critical levels, just 6% of what is required according to International Energy Agency estimates even before the collapse in spending since 2023. Making oil and petroleum supplies the focus of the response risks locking in the region’s dependence on fossil fuels.

Less money for renewable energy and economic development, and more money for fossil fuels and defence equipment, is a combination unlikely to contribute to a safer, more stable region.

This kind of trade-off is not new to Tokyo. In 2023 Japan created Official Security Assistance (OSA), a category of spending on international security and defence assistance that is deliberately juxtaposed to ODA. Levels of OSA spending have jumped in real terms from US$13 million in 2023 to US$44 million in 2025, with further rises to come. Grants for monitoring and surveillance equipment for Malaysia and the Philippines, or high-speed patrol boats for Indonesia, squarely address the region’s well-founded anxiety about maritime security. But if this assistance comes at the expense of investments in human development and human security, at a time of the largest military build-up in Asia in decades, the question of whether OSA could have a destabilising effect in the long run is worth taking seriously.

Japan’s bilateral aid to Myanmar provides a country-level example of its pragmatic approach. Virtually all other donors except for China have ceased development projects in the war-torn country to avoid financing the military regime. Yet Japan continues to finance infrastructure projects, usually implemented by Japanese contractors. There is a case to be made for maintaining presence and access, not least to allow dialogue with a pariah state. But the risk of legitimising and resourcing the junta will weigh heavily in the history books.

The thread that ties these aspects of Japan’s development model – the energy financing package, OSA, and the program in Myanmar – is a reckoning with tough new circumstances. In many ways it represents Tokyo’s understandable attempt to tailor its offering to the region’s demands in 2026. But will it be fit for 2036? Less money for renewable energy and economic development, and more money for fossil fuels and defence equipment, is a combination unlikely to contribute to a safer, more stable region.

Indonesia’s Finance Minister Purbaya Yudhi Sadewa, speaking at a symposium in Jakarta on Wednesday, made an offhand remark about imposing a levy on vessels transiting the Malacca Strait, nodding to Iran’s plans to charge vessels through the Strait of Hormuz. “If we split it three ways between Indonesia, Malaysia and Singapore, that could be quite something, right?” he said.

Purbaya’s comment came against a charged backdrop. Last week, the US warship USS Miguel Keith had passed through the Malacca Strait and a few days later, all three littoral states jointly “reaffirmed their commitment to keeping the straits of Malacca and Singapore open and safe, in accordance with international law.” Earlier in the month, Singapore’s Foreign Minister Vivian Balakrishnan had said that transit passage was “not a privilege to be granted by the bordering state” and “not a toll to be paid”. Balakrishnan later reiterated that Singapore would not participate in any attempt to impose tolls, while Malaysia’s Transport Minister Loke Siew Fook separately reaffirmed his country’s commitment to freedom of navigation.

Purbaya quickly walked back his musing. “If only it could be like that, but that’s not the case.”

The Strait is not a toll road

There is a legal distinction that tends to get lost in such debates. Tolls are permissible on constructed canals – the Panama Canal, the Suez Canal – built as commercial infrastructure within a single state’s territory. Natural straits are different. The Straits of Malacca and Singapore (SOMS) form a continuous waterway connecting the exclusive economic zone (EEZ) at the northern entrance of the Malacca Strait to the EEZ at the eastern end of the Singapore Strait. This qualifies them as a strait to be used for international navigation under the United Nations Convention on the Law of the Sea (UNCLOS). This classification triggers the right of “transit passage”, which is a broader passage right than the “innocent passage” regime that some commentators have mistakenly applied to this strait.

A levy on Malacca Strait transit would not be a toll in the Panama Canal sense, but an act of Indonesia sawing at the very legal branch it sits on.

As bordering states, Indonesia, Malaysia and Singapore are legally obliged not to “hamper transit passage,” and there “shall be no suspension of transit passage” under any circumstances. A toll would have the practical effect of hampering that right and UNCLOS expressly prohibits charges on foreign ships simply for passing through. These are not soft norms but binding legal obligations, with non-compliance subject to compulsory dispute settlement mechanism.

The three littoral states have long honoured them in practice, managing the straits as a single strait through the Tripartite Technical Experts Group (TTEG) since 1971 and the SOMS Cooperation Mechanism. A unilateral levy would also undermine exactly this cooperative framework, which took decades to build.

The deeper problem with Indonesia flirting with UNCLOS violations is what UNCLOS has actually delivered to Indonesia. Indonesia’s territory is itself a product of the archipelagic state concept enshrined in UNCLOS. Under that regime, Indonesia gained sovereignty over all waters enclosed within its archipelagic baselines, including the natural resources within them, and its 200-nautical-mile EEZ and continental shelf are also measured from those same baselines. In concrete terms, UNCLOS gave Indonesia more than 3 million km² of archipelagic and internal waters, nearly 300,000 km² of territorial sea, a further 3 million km² of EEZ, and an extended continental shelf. In other words, UNCLOS transformed a collection of islands separated by open international waters into the unified archipelagic state that Indonesia is today.

A country that has benefited so enormously from UNCLOS should be its most steadfast defender. Any derogation of UNCLOS, however casually floated, ought to be treated as a threat to Indonesia’s own security and territorial integrity. A levy on Malacca Strait transit would not be a toll in the Panama Canal sense, but an act of Indonesia sawing at the very legal branch it sits on.

Iran is not a model worth emulating

Iran’s toll proposal did not emerge from a peacetime revenue strategy. It arose amid an active international armed conflict between the US, Israel and Iran. For Indonesia to look at that scenario and see a revenue opportunity is fundamentally flawed. Following Iran’s wartime example would introduce the instability that makes the Malacca Strait economically valuable. Even setting aside legality, the proposal is unworkable without Malaysia and Singapore, and both have already said no.

The rules-based international order is not a natural condition of the world, but a political achievement constructed through decades of negotiation, compromise, and mutual concession. UNCLOS itself took nine years of negotiations, with states agreeing to constrain their own sovereign impulses because they recognised that the resulting framework served their long-term interests better than the alternative: a world governed by power alone, where the strong do what they will and the weak suffer what they must.

That order is under more strain today than at any point since the post-war institutions were built. When states begin selectively defecting from rules they collectively agreed to, the edifice erodes quietly, precedent by precedent, until the rules no longer rule. This is existential for smaller and middle-power states that cannot fall back on military or economic coercion when rules fail them. What protection do they have, if not the rule of law?

Australia is responding to a vulnerability it rarely states plainly: the country’s economic security depends on maritime access, and that access is fragile.

Not at the coastline. Far beyond it.

Instability in the Middle East has again disrupted shipping through the Strait of Hormuz. Insurance costs are rising. Tanker routes are under pressure. And Australia – heavily dependent on imported fuel – is looking to hedge.

This need was clearly illustrated by Prime Minister Anthony Albanese’s visit to Singapore, Brunei Darussalam and Malaysia in the past fortnight as a bid to secure energy supplies.

Australians still tend to think about this problem in terms of choke points that can be blocked, controlled, or contested.

But they are not the whole problem.

The larger challenge lies elsewhere in what might be called capacity points. The open, distributed sea-lanes of the Indo-Pacific. Vast. Networked. Seemingly resilient. And deeply misunderstood.

Australia’s core vulnerability has never been invasion. It has been isolation. A trading nation at the end of global supply chains, it depends on the steady movement of goods across long maritime routes. Disrupt those routes, and the system does not bend. It tightens.

Australia’s sea-lanes function like an “external circulatory system.” If they fail, the economy does not slow. It seizes.

The question is not whether that system can be disrupted, but how.

Choke points represent concentrated risk. A narrow corridor carries a disproportionate share of global trade. Disrupt it, and the effects are immediate. The Strait of Hormuz is the clearest example. A critical share of global energy flows through a confined space. For Australia, it is a distant but a decisive vulnerability.

Capacity points are different. They can be narrow. They are not easily closed. They offer multiple routes, alternative ports, apparent redundancy. This has encouraged a comforting assumption: that scale provides security.

But capacity systems work in peacetime. Under stress, they degrade.

Rerouted shipping saturates alternative routes. Ports become congested, logistics chains strain, and insurance premiums climb. Small disruptions – harassment at sea, cyber interference, regulatory friction – all accumulate. Nothing breaks cleanly but everything slows. The result is not closure but an erosion.

This is already visible across the Indo-Pacific: a pattern of creeping instability rather than decisive disruption. Trade continues, but at higher cost, with greater uncertainty, and reduced reliability.

The Indo-Pacific’s capacity points are not choke points. They cannot be switched off. But they can be worn down.

This is the defining characteristic of capacity-point risk. It is diffuse, cumulative and easy to underestimate. The distinction matters because Australian strategy still treats maritime access as a binary condition. Sea-lanes are either open or closed, secure or contested.

In reality, they fail in different ways. Choke points fail suddenly. Capacity points fail gradually. One produces crisis. The other produces pressure.

Australia’s vulnerability lies in the interaction between the two. A disruption at Hormuz constrains supply. Disruption across Indo-Pacific sea-lanes constrains distribution. Together, they compound. This is not a hypothetical scenario, and it changes the strategy required.

Choke points demand decisive responses: naval presence, coalition operations, deterrence. Capacity points demand something else: persistence, resilience, and constant management of risk across a broad system. This is where the rule of law at sea becomes critical: not as an abstract principle, but as a practical function.

In choke points, access can be enforced through power. In capacity points, stability depends on the predictability provided by freedom of navigation, accepted norms, and dispute mechanisms. Without these, distributed maritime space becomes a domain of continuous coercion. For a middle power such as Australia, that is a losing environment.

The idea of a “distant rampart” still holds. But it needs updating. It is no longer a line anchored on key straits. It is a network made up of alliances, presence, logistics, systems for maritime domain awareness and legal frameworks. All operating across a vast and contested maritime environment.

Australia has long understood that it cannot secure its sea-lanes alone. It has always aligned with major maritime powers to ensure Australian interests are embedded in their strategic calculations. That logic remains sound.

But alignment is not enough if a national defence strategy focuses only on decisive points and ignores systemic fragility. The Indo-Pacific’s capacity points are not choke points. They cannot be switched off. But they can be worn down. That is the risk Australia now faces. Not sudden isolation, but gradual constraint. Not a single point of failure, but a system under pressure.

Hormuz will remain critical. But it is only the beginning of the problem. The real test lies across the wider maritime system – open, expansive, and deceptively resilient. A maritime nation must think accordingly.

Spiking global oil prices and shipping insurance costs threaten to create a connectivity crisis for the Pacific Islands region. Higher fuel and freight rates will make shipping and aviation more expensive and less frequent, undermining the transport links that underpin trade, tourism and public services.

This will be felt in day-to-day life. Pacific economies rely heavily on imported fuel and long‑distance transport, with about 80% of their energy supply and most electricity generation coming from petroleum products. When oil and insurance costs rise, so do food and transport prices, utility charges, and the cost of all imported goods.

Already the Marshall Islands has declared a 90-day economic emergency. But the oil shock will not be limited to a short burst of inflation. Fuel imports account for 16-24% of the total imports of Fiji, Samoa, Tonga, Vanuatu, Palau, the Solomon Islands and Kiribati. The more fuel‑dependent an economy is, the more exposed it is to higher crude and freight costs. Even the most diversified Pacific economies, such as Fiji, will still face higher power and transport costs. Smaller states such as Samoa, Tonga, Vanuatu and Palau are likely to face fewer flights and more expensive shipping.

What makes the oil shock particularly damaging is the way it is transmitting through connectivity. Higher jet‑fuel prices translate into more expensive airfares and thinner flight schedules, eroding tourism receipts. Pacific tourism depends almost entirely on air travel and tourism generates a major proportion of GDP in Fiji (26%), Samoa (25%), Tonga (11%), Vanuatu (23%) and Palau (38%). If flights become scarcer or more expensive, these tourism‑dependent economies will suffer deeper and longer‑lasting downturns. Domestic mobility will also be severely affected as inter‑island shipping firms cut sailings or raise freight rates.

The fiscal consequences could be severe. Small governments with narrow tax bases have limited room to absorb cost spikes and raise spending. Households already face high living costs, and rising prices for food, fuel, electricity, and transport are already triggering demands for relief measures. Governments may respond by cutting fuel taxes, subsidising utilities or delaying tariff adjustments – all of which would push costs onto public finances or state‑owned utilities. With imported fuels already costing Pacific Island states more than US$6 billion a year and net fuel imports averaging 5-15% of GDP, even a modest sustained oil‑price increase will worsen trade deficits and strain budgets.

The politics of the region will also become more fragile as the shock persists. Higher food, transport, and utility costs risk eroding public support for governments, especially in countries where leaders have promised to improve living standards. In tourism‑dependent Palau, Samoa, Tonga and Vanuatu, a prolonged fall in visitor numbers could destabilise budgets and undermine public‑sector wages. In Papua New Guinea, higher oil prices will boost export revenues but also exacerbate foreign‑exchange shortages and long‑standing structural weaknesses.

The Pacific islands face not just an energy shock but a comprehensive disruption of the transport and utilities that sustain their economies.

These factors will also make it harder for Pacific governments to combat the existential threat that climate change poses to the region. According to IMF estimates, Pacific countries need infrastructure investment of around US$1 billion a year for climate change adaptation. By increasing economic and fiscal strain, higher oil prices illustrate how fossil-fuel dependence and climate change are compounding vulnerabilities.

Geopolitically, a prolonged energy crunch would deepen Pacific states’ dependence on external partners. As budgets come under pressure, governments will look to Australia, New Zealand, the United States, China, Japan and multilateral lenders for budget support, emergency fuel supplies, concessional finance for infrastructure, and assistance to accelerate renewable‑energy projects. The region’s strategic value has already attracted heightened competition among these powers, and higher energy stress will only widen opportunities for influence. External support could help to finance renewable‑energy transitions and improve inter‑island connectivity, but it could also intensify rivalries if aid and loans are tied to broader geostrategic goals.

The risk is that elevated oil and freight prices will produce a permanent connectivity shock. This would keep inflation high, erode real incomes, and force governments into uncomfortable trade‑offs between fiscal sustainability and political stability. Yet persistent high fuel costs could also accelerate investment in renewables and more efficient shipping and aviation. They strengthen the case for renewable energy, food security, and resilient infrastructure to be central to economic policy rather than treated as separate climate agendas.

Such transitions will take years. Until then, the Pacific islands face not just an energy shock but a comprehensive disruption of the transport and utilities that sustain their economies.

The closure of the Strait of Hormuz has delivered a sharp energy shock to Asia, exposing the region’s deep vulnerability to external supply disruptions. Yet even before the conflict, a growing urgency was evident among policymakers to accelerate alternative, reliable low-carbon energy sources, with nuclear power increasingly central to recalibrating Asia’s energy strategies.

Several Southeast Asian nations, including the Philippines, Indonesia, and Vietnam, are stepping up the pace of nuclear preparatory development as part of their energy diversification strategy, with plans targeted between 2030 and 2037. Vietnam and Russia recently concluded an intergovernmental agreement to develop the Ninh Thuan 1 Nuclear Power Plant, bringing back a project that had been shelved since 2016. Singapore is actively studying nuclear energy, particularly small modular reactors (SMRs), to enhance energy security and achieve net-zero carbon emissions by 2050, while no national decision to deploy has been made yet.

China is on track to surpass both the United States and France as the world’s largest producer of nuclear energy by 2030, with a target of 110 gigawatts of installed capacity – an increase of 76% from 2025 levels. At the same time, Japan is returning to nuclear power more than a decade after the Fukushima disaster, as Prime Minister Sanae Takaichi pushes to accelerate reactor restarts and re-establish nuclear as a stable pillar of the country’s energy mix.

Across Asia, energy security is a key driver of renewed interest in nuclear power. Many economies remain heavily dependent on imported fossil fuels, much of which passes through vulnerable maritime chokepoints that can be disrupted by geopolitical tensions or conflict. Nuclear energy offers a way to reduce this exposure. Uranium is relatively inexpensive per unit of energy, can be stockpiled for long periods, and is sourced from a more geographically diversified market, making it a more resilient option.

Rising electricity demand, driven in part by the rapid expansion of artificial intelligence, is further strengthening the case for nuclear energy. Energy-hungry data centres require stable, round-the-clock power, and ongoing disruptions to oil and gas supplies pose risks to these energy-intensive operations. In Southeast Asia, the convergence of a booming data centre sector and emerging nuclear ambitions is beginning to transform regional energy planning. As electricity demand surges, nuclear power is likely to become an increasingly important component of a reliable and sustainable energy mix.

Energy security is a key driver of renewed interest in nuclear power.

Small modular reactors present both promising opportunities and significant challenges for Asia, especially Southeast Asia. On the opportunity side, SMRs can strengthen energy security and diversify power systems that are currently heavily dependent on imported fossil fuels. For many countries in the region, demand for electricity is rising quickly but grids are still developing or fragmented. SMRs, with their smaller unit size and modular deployment, fit more easily into weaker or islanded grids than large gigawatt‑scale reactors. They can be sited near industrial zones, islands, or remote regions and used to provide reliable power, which is particularly attractive for large industrial users, especially data centres. For governments pursuing net‑zero or coal‑phaseout strategies, SMRs offer a way to introduce firm low‑carbon power that can complement renewables.

At the same time, financing conditions for nuclear energy are becoming more favourable. In a significant policy shift, in June 2025 the World Bank lifted its longstanding ban on funding nuclear projects, opening new avenues for developing countries to pursue nuclear power. Similarly, the Asian Development Bank has updated its energy policy to include support for nuclear energy and is partnering with the IAEA to assist countries across Asia and the Pacific that are considering nuclear power.

However, institutional and regulatory capacity is a core challenge. Many states in Southeast Asia do not yet have fully developed nuclear regulatory authorities or long experience with nuclear power governance. Introducing SMRs does not simplify this requirement; in some ways it complicates it. Regulators must adapt frameworks originally designed for large reactors to multiple SMRs, innovative designs, or even floating reactors. Regulatory capacity is a particularly acute human‑resource bottleneck. Effective nuclear oversight depends on independent regulators who can rigorously review complex designs, license and inspect facilities, scrutinise vendor claims, and enforce compliance with international standards. The region currently lacks enough people with hands‑on nuclear engineering and regulatory experience to perform these roles.

Economically, SMRs do not automatically guarantee cheaper power. While the smaller size can lower the absolute cost of a single unit and make financing more manageable, early SMR deployments are likely to be expensive on a per‑kilowatt basis compared with mature nuclear reactor technologies. Asian countries must weigh these costs against rapidly falling prices for solar, wind, and storage, and against entrenched coal capacity.

Taken together, SMRs and conventional nuclear reactors in Asia are best understood as a strategic, long‑term option rather than a quick fix. They offer real benefits: enhanced energy security, support for industrial decarbonisation, and the possibility of being a regional pioneer in advanced nuclear technology. Yet these benefits can only be realised if governments invest early in strong regulatory institutions, legal frameworks for liability and cross‑border issues, and sustained public engagement. Without that foundation, the political, safety, and financial risks could outweigh the advantages – especially in a region where one mishap could reverberate far beyond national borders.

The Hormuz blockade has exposed something deeper than a supply disruption – the overarching limits of Southeast Asian agency in a crisis it cannot shape.

Six weeks into the worst energy disruption in modern history, the countries of ASEAN have done a great deal. Indonesia has frozen fuel prices, expanded subsidies, and ordered flexible work arrangements to cut consumption. The Philippines declared a national energy emergency. Thailand reactivated coal plants and rationed diesel. Vietnam suspended crude exports and accelerated its ethanol blending program. Across the region, governments have improvised with speed and pragmatism.

What none of them has done is shape the crisis itself. No ASEAN member state has had meaningful influence over the decision to blockade the Strait of Hormuz, the terms of ceasefire negotiations, or the conditions under which the strait might reopen. The region’s most consequential energy corridor,  through which over half of ASEAN’s oil imports transit, has been shut down by a conflict in which Southeast Asia countries have had no seat at the table.

This matters beyond the current emergency. For years, ASEAN’s energy policy discourse has been built around the language of resilience – diversification of supply, renewable energy targets, regional power grid integration, strategic reserves. These are serious and necessary goals. But the Hormuz crisis has made visible something that this language tends to obscure: resilience, as currently practised, is a strategy for absorbing shocks, not for reducing exposure to the conditions that produce them.

Resilience, as currently practised, is a strategy for absorbing shocks, not for reducing exposure to the conditions that produce them.

Consider the central irony of the current situation. The United States has long been the implicit guarantor of freedom of navigation through the world’s maritime chokepoints, a role that underpins ASEAN’s entire model of trade-dependent growth. In 2026, it is the United States that initiated the military action against Iran, and the US, having now announced a naval blockade, that is compounding the closure of the strait. The security architecture that was supposed to protect the flow of energy to Asia has become the source of its interruption. For ASEAN, this is not an anomaly. It is the structural risk of depending on a security order you do not control.

Indonesia illustrates the pattern with particular clarity. The country has been a net oil importer since 2003. It consumes around 1.5 million barrels per day but produces fewer than 700,000, with domestic reserves covering barely 20 days of consumption. A quarter of its crude imports transit through Hormuz. Each dollar increase in the oil price expands its fiscal deficit by roughly 400 million dollars; the rupiah’s depreciation against the dollar compounds the damage further. Jakarta’s response, holding subsidised fuel at 60 cents per litre while Brent traded at above $118, is politically effective and historically grounded, drawing on a social contract that dates back to the Sukarno era. But it is also a strategy of fiscal absorption. The state budget acts as a shock absorber, not a shield. And the longer the crisis lasts, the thinner the cushion becomes.

The forced return to coal is perhaps the starkest illustration. Thailand, Vietnam, and the Philippines have reactivated or maximised coal-fired generation to compensate for gas and oil shortages, precisely as all three governments were promoting energy transition roadmaps. The transition agenda is real, but it is being pursued on top of a fossil-fuel foundation that remains fully exposed to external disruption. When the disruption arrives, the foundation is reasserted.

What is most striking, however, is the collective silence. ASEAN, as an institution, has issued no substantive statement on the Hormuz crisis, proposed no coordinated diplomatic position, and exercised no leverage, individually or collectively, on the belligerents. China vetoed a UN Security Council resolution on the Hormuz Strait. India is recalibrating its entire energy diplomacy. South Korea has activated an emergency economic task force. ASEAN is managing fuel coupons and work-from-home mandates. The gap between the region’s economic exposure and its geopolitical weight has never been more visible.

This is not an argument for ASEAN to intervene militarily or to abandon its tradition of non-alignment. It is an argument for recognising that energy security cannot be reduced to supply management. The crisis has made clear that ASEAN’s vulnerability is not primarily technical but political. It stems from a position in the global order where the region absorbs the consequences of great-power decisions without the capacity to influence them. Resilience without agency is adaptation on someone else’s terms.

The policy implications are not new, but the urgency is. Accelerating renewables, building regional storage infrastructure, and diversifying supply routes are necessary steps, and the current crisis may well catalyse investment that years of summitry could not. But they will remain insufficient if they are not accompanied by a harder conversation, about whether ASEAN’s institutional architecture is capable of producing collective positions on the geopolitical conditions that shape its energy security. The Hormuz crisis will eventually end, but the structural exposure it has revealed will not.