The global energy market is again in turmoil, this time because of the US-Israel war in Iran. The Middle East has long been the central hub for worldwide energy supply. About a quarter of the global seaborne oil trade is carried through the Strait of Hormuz alone, according to UNCTAD. At the same time, Qatar and the UAE are major suppliers of liquefied natural gas (LNG). Any military escalation in this region therefore threatens the stability of the entire global energy supply chain.
This situation is especially worrisome for countries like Bangladesh that are heavily dependent on imported energy. Our electricity, industry, transportation, and agriculture sectors all rely on imported energy such as crude oil, refined petroleum, and LNG from the Middle East. The ongoing war has caused significant swings in global oil prices. Fears of supply outages led Brent crude to temporarily rise to about $119 per barrel before falling back slightly. These price hikes put immediate economic strain on import-dependent nations like Bangladesh. A prolonged conflict in the region could severely impact the country’s energy security, put pressure on foreign exchange reserves, increase inflation, and threaten long-term economic stability.
The immediate effect on the country’s economy would likely be an inflation spike. In February, overall inflation stood at 9.13 percent. A spike in fuel prices means transportation, agricultural costs, electricity production, and industrial processes becoming more expensive. This leads to higher food prices and consequently a higher inflation rate. This impact is felt quickly in Bangladesh because diesel is extensively used for food transport, irrigation, and power generation in a number of industries.
A second significant impact involves import costs and forex reserves. As of March 12, our gross reserves stood at $29.64 billion (according to the BPM6 method). A sharp increase in international oil prices could rapidly raise the country’s import costs, further straining the reserves and risking exchange rate instability. The trade deficit, on the other hand, might expand even more, adding to the already deteriorated export performance in the July-January period of FY2026 which registered a negative year-on-year growth of (-)1.93 percent.
The fiscal implications are significant as well. Bangladesh has historically used energy subsidies to shield consumers from volatile global prices. Such subsidies come at a cost. They put significant strains on the government budget, and the fiscal deficit might also grow, limiting financial flexibility. Indeed, the government’s fiscal space has been shrinking over the last several years. As a result, the tax-GDP ratio dropped to 6.8 percent in FY2025 from 7.4 percent in FY2024.
At the same time, the total subsidy expenditure stayed high, estimated at around 2.2 percent of GDP in FY2025. The energy sector—mainly the state-owned Bangladesh Power Development Board (BPDB)—received most of these subsidies. Increasing fuel import costs raised electricity generation costs, yet end-user tariffs remained unchanged to prevent further inflation. The government also paid off some overdue amounts owed to independent power producers. Additionally, fertiliser subsidies continued to be substantial and remittance incentives were expanded amid rising inflows.
Given the current high energy prices in the international market, if Bangladesh adjusts domestic fuel prices to match global rates, it could cause a quick increase in inflation and living costs. Therefore, policymakers must carefully balance maintaining the country’s fiscal health with ensuring price stability.
In this context, it is crucial to seek alternative energy sources. We primarily import oil and LNG from Saudi Arabia, the UAE, Kuwait, and Qatar. Diversifying these sources can help reduce reliance on geopolitical stability. In the short term, importing refined diesel from India and China could be viable, especially with the Bangladesh-India Friendship Pipeline providing key infrastructure support.
Financing high-cost energy imports may also become a major challenge for Bangladesh. In this regard, international trade finance mechanisms could play an important role. The Islamic Trade Finance Corporation has been providing trade finance support to the country, particularly for oil and gas imports. The financial capacity of Petrobangla and Bangladesh Petroleum Corporation (BPC) is a key factor here. Petrobangla is not fully self-funded and has occasionally struggled while importing LNG due to forex issues. Meanwhile, despite being relatively strong financially, the BPC has also experienced periods of foreign currency shortages, resulting in significant payment arrears to international suppliers.
As a result, sustained high energy prices could put considerable pressure on these organisations. In this context, a $350 million support from the World Bank to help Petrobangla with LNG imports starting in 2026 will be beneficial. This funding will be provided through a World Bank-backed guarantee, allowing commercial banks to offer finance. Additionally, Bangladesh might explore government-to-government credit agreements with supplying countries.
Given these realities, implementing a balanced fuel pricing policy is crucial. A sharp increase in fuel prices by the government could rapidly drive up inflation in the transportation, agriculture, and food supply sectors. On the other hand, keeping prices artificially low through extended subsidies would increase fiscal deficits. A better solution might be a gradual price adjustment system, where luxury fuel users encounter larger price hikes while vital sectors like agriculture and public transportation receive targeted support.
Understanding Bangladesh’s specific energy usage is vital. Diesel predominantly powers agricultural irrigation, transportation, industrial generators, and certain power plants. Petrol and octane are mainly for private vehicles and motorcycles. Furnace oil is used in specific power plants, whereas LNG and natural gas are crucial for electricity, industry, and fertiliser production. Consequently, an interruption in diesel supply could quickly affect agriculture, transportation, and food distribution systems. In this context, Bangladesh must implement several immediate and medium-term policy actions. Short-term measures should include increasing strategic fuel reserves, securing alternative supply sources, and prioritising energy distribution for essential sectors. Simultaneously, reducing reliance on the unpredictable spot market by expanding long-term supply agreements would improve supply stability. Over the medium term, strengthening energy storage infrastructure, promoting energy efficiency, and boosting investment in renewable energy are key steps to enhance resilience.
The current crisis also underscores another key issue: lack of domestic energy exploration efforts. It is crucial to expand exploration activities in the country, particularly in the Bay of Bengal, including joint projects between Bangladesh Petroleum Exploration and Production Company Limited (Bapex) and international energy firms. The government has already announced plans to drill several exploration wells in the coming years. If these plans are carried out effectively, they could help reduce the country’s reliance on imported energy.
The ongoing conflict in the Middle East has once again exposed the weaknesses in Bangladesh’s energy security. An energy infrastructure that relies heavily on imports, coupled with limited forex reserves and tight fiscal capacity, makes the economy vulnerable to global energy market fluctuations. This crisis should be viewed not just as a temporary issue but also as a prompt to revisit the country’s long-term energy approach. By diversifying energy sources, enhancing financial mechanisms, and increasing investment in domestic exploration and renewable energy, Bangladesh can strengthen its energy independence and economic resilience against possible global energy disruptions in the future.
Dr Fahmida Khatun is an economist and executive director at the Centre for Policy Dialogue (CPD).
Views expressed in this article are the author's own.
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