Pakistan’s economic vulnerability to global energy shocks has once again come into sharp focus, as a recent study by the Pakistan Institute of Development Economics (PIDE) warns that any disruption in the strategically vital Strait of Hormuz could have severe and far-reaching consequences for the country’s economy.
The study highlights that Pakistan — as a heavily energy-importing nation — is particularly exposed to fluctuations in global oil supply chains. Even a minor disruption in oil flows through the Strait of Hormuz, one of the world’s most critical energy corridors, could trigger a chain reaction of rising fuel costs, accelerating inflation, and mounting pressure on the country’s external accounts.
The research presents a detailed, scenario-based analysis of how global energy disruptions transmit into Pakistan’s domestic economy. According to the study, nearly 20 percent of the world’s petroleum supply — approximately 20 million barrels per day — passes through the Strait of Hormuz. This makes the waterway a critical artery for global energy flows. Any geopolitical tension, military conflict, or logistical disruption in this region can quickly lead to sharp spikes in international oil prices.
For Pakistan, where more than 22 percent of total imports consist of energy products, such disruptions carry significant economic risks. The study stresses that the impact of oil shocks is not limited to crude prices alone but extends across multiple economic channels, making the overall effect more complex and severe than commonly perceived. One of the key contributions of the research is its challenge to the conventional assumption that domestic fuel prices are driven primarily by international crude oil rates. Instead, it highlights a multi-layered transmission mechanism that amplifies the impact of global shocks.
During periods of crisis, freight and shipping costs tend to rise sharply due to supply chain disruptions. War-risk insurance premiums also increase, adding further to the cost of transporting oil. At the same time, exchange rate depreciation makes imports more expensive, while domestic taxes, duties, and distribution margins further compound the final price paid by consumers.
As a result, global oil shocks translate into a series of interconnected domestic price increases, significantly intensifying inflationary pressures across the economy. To assess the potential magnitude of these impacts, the study uses a nonlinear scenario framework, outlining three possible outcomes: mild, stress, and severe shocks. Under a mild shock scenario, inflation could rise to nearly 8.8 percent within six months, reversing recent disinflation trends. In a stress scenario, inflation could exceed 10.4 percent, reaching levels that pose serious macroeconomic risks. In the most severe case, inflation could surpass 12 percent, driven by strong second-round effects that ripple through various sectors of the economy.
The study notes that even under conservative assumptions, the effects of an oil shock would be widespread. Higher diesel prices would increase transportation costs, which in turn would raise the prices of essential goods, particularly food items. This cascading effect would disproportionately affect lower-income households, further exacerbating economic inequality.
In addition to inflationary pressures, the study highlights significant risks to Pakistan’s external sector. A disruption in the Strait of Hormuz could lead to a substantial increase in the country’s petroleum import bill. Monthly petroleum imports could rise by as much as $384 million, while the current account — which may initially be in surplus — could quickly shift into deficit within a matter of months. Over the course of a year, the total external impact could exceed $4.6 billion in a severe shock scenario.
This would create a dangerous feedback loop. Higher import costs would put downward pressure on the Pakistani rupee, leading to further increases in fuel prices and inflation. The resulting economic instability could complicate policymaking and limit the government’s ability to respond effectively. A particularly important finding of the study is the central role of high-speed diesel (HSD) in transmitting inflation throughout the economy. Diesel is deeply embedded in Pakistan’s economic structure, powering transport systems, agricultural machinery, and supply chains.
Because of this, any increase in diesel prices has a disproportionately large impact on overall inflation, especially food inflation. The study identifies diesel as a key driver of second-round effects, where initial price increases lead to broader and more persistent inflationary trends.
In light of these risks, the study calls for urgent and coordinated policy measures to enhance Pakistan’s resilience to external energy shocks. Among its key recommendations is the introduction of a transparent and rules-based fuel pricing mechanism. Such a system would reduce uncertainty and improve the predictability of domestic fuel prices. It also emphasises the need to prioritise monitoring of diesel prices, given their critical role in the economy. Improved coordination between key institutions — including the State Bank of Pakistan, the Ministry of Finance, and the Petroleum Division — is essential to ensure a coherent policy response.
Targeted support for essential sectors, such as public transport and food supply chains, is also recommended to mitigate the impact on vulnerable populations. In addition, the study highlights the importance of proactive fuel financing strategies to protect the country’s external account from sudden shocks.
Over the longer term, the research underscores the need for structural reforms aimed at reducing Pakistan’s dependence on imported energy, particularly diesel. Investments in alternative energy sources, improvements in energy efficiency, and diversification of supply routes could help strengthen the country’s energy security. The overarching message of the PIDE study is clear: Pakistan’s exposure to global energy disruptions is deeper and more complex than widely understood. A disruption in the Strait of Hormuz is not merely an external geopolitical event — it has the potential to trigger a full-scale domestic macroeconomic shock.
As global uncertainties persist, the need for proactive planning and coordinated policymaking has become more urgent than ever. Managing fuel pricing, controlling inflation, and safeguarding external stability are closely interconnected challenges that require a comprehensive and forward-looking strategy.
Without such measures, Pakistan risks remaining highly vulnerable to external shocks, with serious implications for economic stability and the well-being of its population.