Middle Eastern Turmoil and Indonesia's Economic Risks

Geopolitical conflicts often occur far from the daily lives of citizens. However, when conflict erupts in a region serving as a centre of global energy production, its effects can rapidly spread to oil prices, inflation, and the economic stability of various nations.

The escalation of conflict between Iran, Israel, and the United States since late February 2026 has once again demonstrated the close relationship between geopolitics and energy markets. As tensions in the Middle East—one of the world’s primary energy supply centres—have increased, markets have reacted swiftly. Brent crude oil prices briefly broke through US$80 per barrel, whilst global financial markets shifted towards a risk-off posture.

Market response was remarkably rapid. During 27 February–6 March 2026, the VIX global equity volatility index rose approximately 9.6 per cent, whilst the MOVE index—a bond market volatility indicator—increased 7.9 per cent. This volatility surge was accompanied by pressure on global equity markets. The S&P 500 corrected roughly 2 per cent, the FTSE 100 fell 5.7 per cent, Germany’s DAX weakened 6.7 per cent, and Japan’s Nikkei declined 5.5 per cent.

Pressure in emerging market indices was even steeper. During the same period, the Jakarta Composite Index corrected approximately 7.9 per cent, whilst Thailand’s equity index fell 7.7 per cent and the Philippines’ roughly 4.4 per cent. This pattern reflects the global investor tendency to reduce exposure to risky assets, particularly in emerging markets, when geopolitical uncertainty rises.

In bond markets, investors also demanded higher risk premiums. Between 27 February and 6 March 2026, US government bond yields rose approximately 20 basis points, UK yields increased 40 basis points, and German yields rose some 22 basis points. A similar pattern emerged in emerging markets, with Indonesian government bond yields rising 18 basis points, whilst Philippine yields climbed roughly 38 basis points.

Shifts in investor behaviour were also visible in foreign exchange markets. The US dollar index strengthened approximately 1.4 per cent, whilst the rupiah depreciated some 0.8 per cent during the same period. Demand for hedging assets such as gold also increased.

The clearest impact appeared in energy commodity markets. During this period, Brent crude oil prices surged roughly 27.9 per cent, whilst coal prices rose 15.5 per cent and natural gas increased 11.4 per cent. This surge reflects heightened risks of energy distribution disruption in the Middle East, which serves as the primary global energy trading corridor.

For net oil importers like Indonesia, these developments carry direct implications for domestic economic stability. Over the past two decades, Indonesia’s energy structure has shifted significantly. In the early 2000s, Indonesia remained a net oil exporter, but this changed as domestic production declined and energy consumption increased.

Indonesian oil production fell from approximately 1.45 million barrels daily in 2000 to roughly 570,000 barrels daily in 2024. Conversely, consumption increased from approximately 1.12 million to 1.63 million barrels daily over the same period. The gap between energy production and consumption has widened considerably.

This transition transformed Indonesia into a net oil importer from the mid-2000s onwards. The supply deficit, which stood at approximately 224,000 barrels daily in 2005, has now risen to over one million barrels daily by 2024. Import dependency has also increased sharply. Whilst in 2005 imports met only roughly 17.6 per cent of domestic demand, that figure reached approximately 65 per cent by 2024.

High import dependency makes Indonesia’s economy increasingly sensitive to global geopolitical dynamics. Notably, nearly 15 per cent of Indonesia’s oil imports originate from the Middle East, a region with relatively elevated geopolitical risks.

Recent developments have even demonstrated how global energy distribution routes can be disrupted rapidly. Tanker traffic through the Strait of Hormuz—one of the world’s most vital oil trading corridors—reportedly declined by 78–90 per cent within a single week, whilst oil shipping costs surged more than 100 per cent.

Rising global energy prices carry broad economic implications for Indonesia. Higher oil prices increase foreign exchange requirements for energy imports, potentially depressing the rupiah’s exchange rate. Simultaneously, energy represents a crucial component in the cost structure of the economy, so rising energy prices can increase transportation and distribution costs whilst driving inflationary pressure.

These pressures ultimately constrain economic policy space. Rising inflation and weakened exchange rates can restrict monetary easing options. On the fiscal side, elevated energy prices risk increasing energy subsidy burdens in the state budget if the government attempts to restrain domestic price increases.

This vulnerability is particularly acute given Indonesia’s limited energy resilience. The nation’s fuel reserves are estimated at only approximately 23 days’ consumption, far below the international energy security standard of roughly 90 days.

In comparison with other ASEAN nations, Indonesia’s position is relatively disadvantaged. Singapore maintains energy reserves of approximately 90 days, Thailand roughly 60 days, Vietnam 56 days, and the Philippines 52 days. Malaysia stands at approximately 30 days, whilst Indonesia possesses only roughly 23 days—marginally above Laos at approximately 21 days.

This comparison demonstrates that Indonesia’s energy vulnerability stems not solely from import dependence, but also from constrained strategic reserve capacity. With relatively modest energy reserves, each global oil price shock has the potential to translate more rapidly into domestic inflationary pressure, currency weakness, and increased energy subsidy burdens.