Global oil shock, local fuel crisis

The recent escalation of the Iran conflict has triggered a sharp supply shock in global oil markets, with immediate consequences for fuel-importing economies. Oil prices have risen significantly within a short period. Brent crude increased from around USD 72 per barrel in late February 2026 to above USD 110 by early April, while WTI followed a similar trend. This surge reflects heightened risks around supply routes, particularly disruptions linked to the Strait of Hormuz.

For countries heavily dependent on imported fuel, such shocks are transmitted quickly into domestic prices. However, the extent and speed of this pass-through vary significantly across economies, depending on policy choices, pricing mechanisms, and structural vulnerabilities.

Pakistan stands out in this episode for experiencing one of the sharpest increases in retail fuel prices. Before the shock, petrol was priced at around Rs266 per litre and diesel at Rs280. By early April, these had risen to approximately Rs458 and Rs520, respectively. This represents an increase of over 70 percent for petrol and more than 85 percent for diesel within a matter of weeks.

Such a steep adjustment reflects a shift in policy approach. Authorities have indicated that the earlier strategy of absorbing price shocks through subsidies was no longer fiscally sustainable. As a result, a larger share of the global price increase was passed directly to consumers. This decision, while easing fiscal pressure, has amplified inflationary risks and increased the burden on households and businesses.

At the same time, Pakistan’s pricing structure may have contributed to the magnitude of the increase, particularly for diesel. Some analysts argue that locally refined fuel is priced on the basis of import parity, effectively treating domestic production as if it were imported. This mechanism can raise final prices beyond what global crude movements alone would justify, limiting the extent to which any domestic cost advantages or tax adjustments benefit consumers.

A comparison with other oil-importing countries highlights how differently such shocks can be managed. In Nepal, petrol and diesel prices increased by roughly 28 percent over the same period. Although Nepal does not directly import through the Strait of Hormuz, it sources fuel via India, meaning global price changes are still transmitted, but often with some delay or smoothing.

In Zambia, the pattern was mixed. Petrol prices remained relatively stable, increasing only marginally, while diesel prices rose by around 28 percent. This divergence reflects not only global price movements but also exchange rate pressures and domestic pricing adjustments.

These differences underline an important point: global oil shocks do not translate uniformly across countries. The final impact depends on several factors, including import dependence, exposure to specific supply routes, exchange rate movements, and the government’s capacity to absorb or delay price increases.

Pakistan’s case reflects a combination of multiple vulnerabilities. The country relies heavily on imported fuel, is closely linked to Gulf supply routes, and faces persistent constraints in fiscal and external accounts. Limited foreign exchange reserves and high debt levels reduce the ability to cushion external shocks. At the same time, pricing policies that emphasize immediate pass-through can amplify short-term economic pressures.

The broader lesson is that while oil shocks are global, their domestic consequences are shaped by policy and structure. Countries that maintain fiscal space or adopt gradual adjustment mechanisms may be able to smooth the impact on consumers. In contrast, economies with tighter constraints and rigid pricing frameworks are more likely to experience sharper and more immediate price increases.

For Pakistan, the challenge going forward is to balance fiscal sustainability with inflation control. Managing this trade-off will require careful calibration of energy pricing, taxation, and broader macroeconomic policy, particularly in an environment where external shocks remain frequent and unpredictable.

Copyright Business Recorder, 2026