Iran war exposes ASEAN’s acute oil vulnerabilities

The war in Iran has exposed the Association of Southeast Asian Nations’ (ASEAN) significant economic vulnerabilities to instability in the Middle East, particularly through disruptions to energy supplies and global trade routes. The bloc’s heavy dependence on oil imports transiting the Strait of Hormuz has amplified these risks, triggering currency depreciation, rising subsidy costs and intensified fiscal pressure across member states. Against this backdrop, ASEAN issued a statement calling for maximum self-restraint from both warring sides, Iran and the United States. The language closely mirrored the group’s response to Russia’s full-scale invasion of Ukraine, a result of ASEAN’s neutrality and refusal to assign blame to any party. Individual member states, however, offered varied reactions soon after the conflict began in February 2026. The Philippines and Thailand focused chiefly on the safety of their citizens in the Middle East. Malaysia and Brunei adopted sharper criticism, condemning the joint U.S.-Israel airstrikes. Kuala Lumpur described the attacks as a violation of international law. In contrast, Indonesian President Prabowo Subianto responded proactively, offering to travel to Tehran to mediate and urging both sides to exercise maximum restraint. Tehran expressed appreciation through its ambassador in Jakarta but assessed the initiative as unlikely to be effective. Indonesia’s neutrality has also been called into question because of its recent membership in the U.S.-led Board of Peace. Although the role is non-binding, some domestic politicians view it as alignment with American interests. Despite these diplomatic efforts, the region has not been shielded from the severe economic fallout of the Iran conflict, with Indonesia – ASEAN’s de facto leader – bearing some of the most immediate and acute pressures. Rising oil prices strain Indonesia’s fiscal position Since early March 2026, the Indonesian rupiah has depreciated by more than 7 percent against the U.S. dollar. In March, Indonesia’s currency fell to its lowest level since the 1998 Asian financial crisis. By late April, the currency dropped to a record low, prompting the central bank to intervene to stabilize it. Iran’s decision to close the Strait of Hormuz – a vital chokepoint – drove oil prices above $100 per barrel, peaking near $120 in March. By the end of June, crude prices moderated to just above $70 per barrel amid hopes of de-escalation, though full normalization and a return to stable prices is expected to take months. Indonesia’s 2026 state budget had forecasted a fiscal deficit equal to 2.7 percent of gross domestic product (GDP) on the assumption of oil prices around $70 per barrel – a factor that is entirely out of Jakarta’s control. Before the escalation of the conflict in the Middle East, Indonesia was already facing fiscal uncertainty. This was largely due to concerns surrounding the free nutritious meal program, which was projected to cost approximately $19.5 billion, accounting for about 8.7 percent of the country’s GDP. Mindful of the 1998 precedent (when sharp subsidy cuts and fuel price hikes triggered protests that contributed to the fall of President Suharto’s 32-year regime), the government has prioritized maintaining stable fuel prices. Domestic oil production meets only about 60 percent of crude demand, with the rest imported. The country’s reliance on imported oil and refined goods has exposed it to global price shocks. Jakarta has estimated an additional $5.9 billion will be needed in energy subsidies, to be funded through cuts across ministries and institutions. As part of the 2026 budget projection, Indonesia earmarked around $22.5 billion for energy subsidies and compensation to state-owned companies Pertamina and PLN. Subsidized fuel sales are restricted to 50 liters per day. The subsidies provided to Pertamina and PLN are essential because they help cover the losses these firms incur when selling energy at below-market prices. The government aims to protect the public’s purchasing power as long as prices are affordable. April 2, 2026: A student carries trays of food during the distribution of the Free Meal Program in Malang, Indonesia. The Indonesian government has reduced the meal distribution program to five days a week due to the conflict between Iran and the U.S. © Getty Images The ambitious free nutritious meals program has not escaped pressure emanating from the Iran conflict, either. The meal distribution has been officially reduced from six days per week to five days to improve budgetary efficiency. Diversification is an important strategy for mitigating the impact of recent events in the Middle East. For Indonesia, that requires transitioning more aggressively to renewable energy, including shifting from the B40 biodiesel program to the B50 program, which uses a 50 percent palm oil-based blend, set to launch in July 2026 . Indonesia is the world’s largest producer of palm oil. The objective is to reduce reliance on fossil fuel imports and save on subsidies. To enhance energy security, President Subianto is working to establish broader economic partnerships with Gulf states and to improve trade relations with the U.S. and potentially Russia. Indonesia plans to purchase additional crude oil from the U.S. to replace some of its Middle Eastern supply following the closure of the Strait of Hormuz. This marks a significant step toward Jakarta deepening strategic trade ties with Washington. × Facts & figures Bloomberg Asia Dollar Index Regional ripple effects Indonesia exemplifies the ASEAN experience: energy dependent, vulnerable to trade restrictions, fiscal sensitivity and walking a geopolitical tightrope. However, volatility in the Middle East extends well beyond Indonesia. Currency pressures are widespread. Since the onset of the conflict, the Thai baht has fallen by over 4 percent against the U.S. dollar, while the Philippine peso has declined by more than 5 percent. Thailand is among the ASEAN countries most heavily affected. In addition to disruptions in shipping, the nation is significantly dependent on international tourism, which has taken a hit due to the turmoil in the Middle East. Flight cancellations and soaring fuel costs could potentially lead to a loss of up to 3 million tourists if the conflict reignites. The Thai tourism sector is projected to incur losses of 150 billion baht (about $4.6 billion) in 2026. Thai Prime Minister Anutin Charnvirakul’s government responded to the energy shock with a raft of measures: temporarily introducing diesel price caps before easing them in favor of targeted support, restricting fuel exports except to neighbors such as Laos and Myanmar, increasing spot purchases of liquefied natural gas (LNG) and encouraging greater use of biofuel blends. Bangkok also negotiated safe-passage arrangements with Iran for tankers through the Strait of Hormuz. April 1, 2026: The cost of living in Thailand is rising as petroleum prices skyrocket amid the war in Iran. © Getty Images The Philippines relies on imports for approximately 95 percent of its oil requirements, primarily sourcing it from the Middle East. This near-total dependence leaves the nation highly susceptible to disruptions in the global oil supply. Philippine President Ferdinand Marcos Jr. declared a national energy emergency in March. This move enables the country to bypass certain standard procedures for securing energy supplies while better managing costs. Malaysia too faced rising costs of refined petroleum products, prompting adjustments to its subsidy framework. Vietnam is grappling with rising costs of power generation and manufacturing inputs due to tighter global supply. Like its neighbors, it has tapped fuel stabilization funds and procured crude oil from alternative sources outside the Middle East. Meanwhile, Singapore − a crucial refining and logistics hub − has faced higher shipping insurance premiums due to the elevated risks in the Persian Gulf. The crisis has also reinforced the Strait of Malacca’s importance as a key alternative route, prompting adjustments to maritime traffic management. Singapore has supported voluntary regional information-sharing on energy reserves and joint diplomatic outreach efforts to secure additional LNG supplies. Read more on Southeast Asia by Adinda Khaerani Epstein Prabowo’s policies spark both hope and concern in Indonesia Singapore carefully balances U.S. and China relationships The significance of ASEAN as major powers recalibrate Southeast Asian nations boost energy security These country-level responses underscore the broader regional challenges in Southeast Asia posed by conflict in the Middle East. ASEAN is significantly affected by disruptions to shipping routes, as 55 percent of its crude oil is imported. Agriculture, transportation and tourism costs in the region have increased. Through the ASEAN Petroleum Security Agreement (APSA), the bloc is now tightening its focus on diversification and collaborative initiatives, such as joint stockpiling and oil-sharing arrangements during periods of supply shortages. The organization is increasingly feeling pressure to enhance practical coordination and expedite the transition toward energy cooperation, including a fuel-sharing framework, though this is not backed by a binding treaty. During ASEAN’s May 2026 summit in Cebu, Philippines, leaders prioritized the swift ratification of the APSA and advanced discussions on a regional fuel stockpile. They reaffirmed commitments to developing a more robust ASEAN Power Grid and accelerating renewable energy deployment, including greater biodiesel and bioethanol blending, electric vehicle adoption and cross-border infrastructure projects such as the Trans-ASEAN Gas Pipeline. ASEAN and EU move closer on security and trade The unrest in the Middle East has also led ASEAN and the European Union to strengthen their strategic ties. The two multilateral organizations unveiled the Major Maritime Commerce Facilitation Agreement in March 2026, aiming to improve the efficiency, cost-effectiveness and speed of shipping and trade between Southeast Asia and Europe. The agreement underscores their shared need to diversify trade and reinforce economic ties. The 25th ASEAN-EU Ministerial Meeting in April focused on enhancing coast guard cooperation, safeguarding critical marine infrastructure and promoting the rules-based order. The EU is negotiating individual free trade agreements with Thailand, the Philippines and Malaysia, aiming to finalize them by next year. Southeast Asia is vital for the broader Indo-Pacific region, with its waters serving as key connectors of major trade routes, including the South China Sea and the Strait of Malacca. By collaborating with ASEAN, the EU secures export markets for its manufacturers seeking to offset lost trade with the U.S. due to President Donald Trump’s restrictive trade policies. Europe can also gain access to alternative energy markets while decreasing its reliance on unstable or single-source providers. ASEAN stands to gain from increased European investment, advanced technology and support for the transition to renewable energy sources. × Scenarios Likely: ASEAN moves toward multi-hedging The ties between ASEAN and the U.S. are likely to concentrate on energy investments and technology transfers to help member states build robust operations and diversify away from Gulf oil. The hostilities in the Middle East will deepen the bloc’s divisions, with individual countries taking their own measures rather than collective ASEAN backing for any of the warring parties involved. Under President Prabowo’s administration, Indonesia will most likely prioritize short-term social stability over long-term budget restructuring. Despite the 60-day ceasefire and negotiations between Washington and Tehran, the rupiah is likely to remain under pressure, as geopolitics is not the sole driver of its decline. The closer ASEAN-EU partnership suggests that both parties recognize maritime security in the Indo-Pacific as a global economic and strategic concern. ASEAN’s response remains focused on de-escalation and neutrality, reflecting the organization’s long-standing diplomatic strategy and its attempt to maintain centrality in an increasingly polarized world order. Unlikely: ASEAN grows closer to Washington The sentiment in Southeast Asia, which is primarily composed of Sunni Muslims, is already hostile toward Israel and, by extension, negative toward the U.S. Their combined strikes on Iran have affected ASEAN member countries’ energy supplies, shipping and broader economies. Closer partnership with the U.S. on energy security is unlikely to change the bloc’s growing alienation from Washington in other areas and is unlikely to lead to a broad geopolitical alignment against China. The war could further strain ASEAN’s consensus-based decision-making. It is unlikely to break the group apart but rather accentuate existing structural flaws.