Hormuz closure could triple Pakistan’s oil bill, push inflation to 15pc-17pc

Oil markets are being shaken once again globally by geopolitical strains in the Middle East.

The mounting tension between the United States, Israel and Iran has cast serious doubts over the security of the Strait of Hormuz - a narrow yet important shipping route that serves as a passage of almost 20 percent of the world seaborne oil trade.

In the case of Pakistan, which is largely reliant on energy imported, any form of disruption can have grave effects.

Brent crude is already up to approximately USD 92 per barrel, representing a geopolitical war premium and not market fundamentals. Three months of disruption of tanker movement through Hormuz may result in prices rising to USD 120-150 per barrel in case the tension intensifies. Pakistan relies mainly on imported oil; more than 80-85 percent of which originates in the Gulf region (mainly in Saudi Arabia, the UAE and Kuwait) and the entire import flows through the Hormuz. Such a geographic concentration renders Pakistan very vulnerable.

About 30 percent of the total imports of Pakistan are petroleum products. Empirical estimates indicate that an increment in global oil prices by USD 10 per barrel raises the annual oil import payments of Pakistan by USD 1.8-2 billion. A three-month Hormuz closure could triple Pakistan’s monthly import bill to USD 3.5–4.5 billion and drive inflation from around 7 percent to 15–17 percent. Other shipping insurance and freight expenses may increase the trade deficit by an additional USD 120-160 million a year, straining foreign exchange reserves. (PIDE Policy Viewpoint: “World Oil Price Volatility, Middle East Geopolitics, and Pakistan’s Inflation Dynamics” March 2026)

The historical events highlight the speed of oil shock transmission domestically. The surge of CPI in 2008, 2011 and 2022 was 14 percent-25 percent mainly through transport, energy and food prices. Domestic fuel prices have already increased by PKR 55 per liter, intensifying inflationary pressures. With Brent crude potentially going up to USD 100–110+, CPI could approach 15–18 percent.

Energy buffers in Pakistan are limited. The strategic petroleum reserves only cover 10-14 days of consumption which leaves very little room to absorb shocks. In comparison, India has greater reserves and FX buffers of up to 65-70 days and Bangladesh benefits from more stable earnings. In Sri Lanka, the recent crisis demonstrates the risk of having weak external buffers with high levels of oil dependence.

Pakistan is looking to other options. Recent discussions with Saudi Arabia to ship oil through the Red Sea port of Yanbu may reduce Hormuz dependence, although longer routes increase freight and insurance expenses by 150-200 percent, extend the delivery time, and raise the logistical congestion.

Pakistan must adopt several measures in the short-run to protect its economy from potential energy shock. PSO needs to monitor the arrival of tankers, and stocks of more than 14 days must be maintained, with the activation of the Yanbu route on Saudi/UAE cargoes. In case the stocks drop to less than 10 days, the fuel rationing with odd-even vehicles regulations and 50-60 percent work-from-home regulations could be implemented. Temporary spot buying like India did with Russia, would save USD 1-1.5 billion and limit CPI effect to 8-10 percent.

Structural measures are required in the medium term. The strategic petroleum reserves would be expanded to 60 days (approximately 20 million barrels) through Saudi plant worth 2 billion dollars. By hedging 20 percent of imports at USD 90/bbl using SGX/Dubai exchanges, PSO would save USD 800 million annually and reduce half of CPI pass-through. Temporary export bans on essential items may help save domestically available goods in times of panic.

Short-term policies may avoid immediate shock of supply, whereas medium-term policies create resilience, decrease volatility of oil markets dependence, and minimize pass-through of inflation.

Pakistan is still a new entrant in stabilizing the economy with the help of IMF. Any abrupt oil shock can derail the recovery, increase the current account deficit, speed up inflation, and create even greater fiscal burdens so that policymakers have few means of offering specific subsidies.

The emerging Middle East volatility underscores the fact that energy security cannot be isolated as far as economic stability is concerned. Strengthening resilience against global oil volatility is no longer a long-term goal but an immediate policy priority. Timely coordinated policy measures can mitigate the impact, stabilize the economy, and transform vulnerability into an opportunity to enhance energy security.

Copyright Business Recorder, 2026