Energy shock

WITH the Strait of Hormuz caught in a dangerous limbo, the global energy markets have entered the most uncertain period of their history. Last month, the International Energy Agency predicted that both oil supply and demand growth would be slow compared to last year.

This suggests not just supply disruptions but also a weakening global economy. Oil markets are responding to the lingering crisis through volatility, shortages and rising prices. The IEA warning that demand destruction will spread points to a grim reality: high prices are constraining economic activity, particularly in nations dependent on imported energy such as Pakistan.

Iran’s control over the choke point has already triggered what the IEA says is the largest supply disruption. Compounding the crisis, the agency said, countries have begun hoarding energy stocks and restricting exports, amplifying shortages and undermining market stability. The US blockade of the strait to restrict Iranian tanker movement has added greater uncertainty to already strained supply chains.

Soaring fuel costs have a global impact, but Pakistan, which depends on imports to meet most of its energy needs, is particularly vulnerable. With no end to the conflict in sight, the market upheaval is fast evolving into a domestic emergency.

Prime Minister Shehbaz Sharif’s statement that the country’s oil import bill has jumped from $300m to $800m shows the scale of the shock to a fragile recovery, with the current surge affecting transport, agriculture and food prices as well as household budgets. The oil price pass-through effects are particularly severe in a context where real incomes are already under pressure, pushing more households towards reduced consumption and lower living standards.

The government is in a tricky situation. Passing on the full impact of higher global oil prices risks triggering a public backlash and accelerating inflation, while absorbing the shock through subsidies will widen fiscal deficits and deepen macroeconomic imbalances.

The State Bank’s decision to raise the policy rate to 11.5pc reflects the growing concern that inflationary pressures could become entrenched. Higher global energy prices, elevated freight and insurance costs, and persistent supply chain disruptions are not temporary shocks; they are evolving into medium-term constraints on growth. A tighter monetary policy may help anchor expectations, but it also risks dampening investment and slowing economic activity further.

The longer the crisis persists, the more profound its consequences will be. Sustained energy price increases are likely to accelerate inflation, erode purchasing power, and push more people below the poverty line. Economic growth could stall, while the already strained balance-of-payments may deteriorate further due to the swelling import bill.

Without a credible strategy to reduce dependence on imported energy and build resilience against external shocks, each spike in global prices, now and later, will have a destabilising impact.

Published in Dawn, May 5th, 2026