Fuel price shock: what policy responses reveal about resilience
The latest news of a US-Iran deal to end the current conflict has taken upside pressure off crude markets, with Brent falling below $80 per barrel for the first time since March. However, crude prices remain above pre-conflict levels, and inflation effects are likely to persist – especially in economies where inflation pass-through is already high. Exposed emerging and developing economies (EMDEs) have deployed a range of measures to manage the recent oil spike, but their limited use of structural policies suggests that most responses remain focused on short-term shock management.
In fuel-dependent economies, diesel prices affect the cost of freight and public transport, while liquefied petroleum gas (LPG) affects small businesses. These shocks not only affect headline inflation but also core inflation, since energy is an input in almost all production processes. This input-cost pass-through can be sustained if the global shock is absorbed domestically. For example, the Central Bank of the Philippines estimates that a major oil shock produces second-round effects on core and food inflation that can persist for up to 18 months. Similar effects have been observed in Mexico and Brazil during the Russian invasion of Ukraine.
In Asia, net oil and gas imports account for roughly 2.5% of GDP, while oil and gas consumption stands at around 4% of GDP – nearly twice Europe’s share. Given this high exposure, the Asian Development Bank’s March scenario, assuming disruptions end in June, estimated regional growth to be 0.3% lower and inflation 0.6% higher. Retail gasoline prices have increased by approximately 40% in emerging Asia and by about 50% in Lesotho, Rwanda and Tanzania since the onset of the war.
Higher energy import bills, alongside related currency depreciation, also amplify the effect of higher energy and food prices. Since the start of the conflict, exchange-rate pressure has been visible across EMDEs. In Sri Lanka, for instance, the domestic cost of imported fuel is determined by Singapore Platts petrol and diesel prices and the USD/LKR exchange rate. Between March and mid-June, Singapore Platts prices – the relevant benchmark for Sri Lanka’s fuel imports – were about 30% higher. Over the same period, the Sri Lankan rupee depreciated by almost 9%. The combined effect of these drove the recent increase in Sri Lanka’s domestic retail fuel prices.
Policy responses have focused on three primary aims: cushioning consumers’ purchasing power, reducing fuel demand and limiting future exposure to energy shocks. Figure 1 shows the number of countries in the International Energy Agency (IEA) tracker with at least one policy in each category of intervention.
Figure 1: Energy crisis policy response