The recently concluded war between Iran and Israel has left a trail of questions and lessons for Pakistan as its ripple effects are already reverberating through global oil markets, regional security dynamics and the economic calculus of countries. The escalation, marked by Israeli strikes on Iranian military and nuclear sites and threats of retaliation, created intense volatility in global energy prices and heightened geopolitical tensions in one of the world’s most strategic regions. The implications are especially dire for energy-importing countries, fragile economies, and nations situated near the conflict zone.
Following Israel’s initial strikes, Brent crude surged by 7-13%, peaking at $78.50 per barrel-its highest since early 2025-before settling around $74. This spike reflects both actual disruption fears and speculative futures trading driven by instability in the Gulf region. Analysts predict that oil prices may stay elevated due to shipping inflation and persistent geopolitical risk premiums. Forecasts from global energy analysts and market institutions, including Wood Mackenzie, suggest potential scenarios in which prices could spike as high as $90 to $120 per barrel if Iran retaliates by targeting oil infrastructure or closing the Strait of Hormuz. While no physical supply has yet been disrupted significantly, market psychology is driving an anticipatory price reaction.
Diplomatic engagement with Iran and Gulf states is essential to ensure border trade continuity and avoid direct fallout.
The Strait of Hormuz, through which about 30% of global seaborne oil flows, remains a key strategic chokepoint. Even verbal threats or limited skirmishes near the waterway can spark panic in energy markets. Although OPEC+ currently has some unused output capacity that could buffer minor disruptions, sustained conflict could pressure both supply and shipping channels. Analysts agree that the conflict’s escalation intensity and duration, the specific nature of Iranian retaliation, and global demand trends will collectively shape the price trajectory in coming weeks and months.
Beyond oil markets, regional spillovers are already materializing. There has been a 20% rise in shipping insurance premiums for Gulf-Red Sea trade routes, increasing the cost of trade and transportation across sectors, including essential imports like food and textiles. Fuel shortages have been reported in Pakistan’s southwestern province of Balochistan, which historically relies on informal fuel trade from Iran. These disruptions have triggered transport delays, price hikes, and public unrest. Meanwhile, in a unique economic twist, Pakistan has benefited from a short-term rise in barter trade with Iran, exporting rice in exchange for oil and consumer goods amid Iran’s growing isolation from the global banking system.
Pakistan is particularly exposed to the fallout from this conflict. As a major energy importer with fragile external accounts and limited foreign exchange reserves, any sustained rise in oil prices could destabilize its delicate macroeconomic balance. Fuel constitutes over 30% of Pakistan’s import bill. Higher prices not only inflate the import burden but also exert pressure on the exchange rate, increasing the cost of foreign debt servicing. This, in turn, can lead to a depreciation of the Pakistani rupee, further feeding inflationary pressures.
The State Bank of Pakistan (SBP), which has maintained interest rates at 11% to support disinflation and modest growth recovery, now faces a monetary policy dilemma. If global oil prices remain high and imported inflation returns, the SBP may be forced to tighten again-potentially stalling investment and slowing GDP growth below the already modest target of 4.2% for FY 2025-26. Policymakers must now grapple with a growing list of competing objectives: preserving price stability, managing fiscal consolidation under IMF oversight, and protecting households from rising living costs.
On the fiscal side, elevated oil prices increase subsidy requirements for fuel and electricity, especially for agricultural, industrial, and transport sectors. This could complicate the government’s efforts to meet IMF conditions, including maintaining a primary surplus, eliminating untargeted subsidies, and enhancing revenue collection. Any failure to meet quarterly IMF benchmarks could delay disbursements, reduce investor confidence, and reignite external financing stress.
The border impact is also significant. Fuel shortages in Balochistan, exacerbated by disruptions in Iranian supplies, have led to social unrest and public demonstrations in border towns. These shortages not only strain provincial governance but also underscore Pakistan’s overreliance on informal trade networks and limited strategic fuel reserves. Furthermore, any regional escalation could generate cross-border security threats, including refugee inflows or militant activity in sensitive areas.
On a broader geopolitical level, the conflict has raised global fears of a more extensive war. If Iran closes the Strait of Hormuz or directly attacks Gulf infrastructure, the consequences could include oil price spikes above $120, panic buying in global energy markets, and even U.S. military involvement. China, a major importer of Iranian oil and key player in Gulf diplomacy, is closely monitoring the situation. Russia, meanwhile, may exploit the conflict to strengthen its own position in the energy market, particularly if Western attention is diverted.
For emerging economies like Pakistan, India, and Indonesia, the risks are acute. These countries rely on energy imports and are already grappling with inflation, slowing growth, and constrained fiscal capacity. Historical analysis suggests that a $10-20 increase in oil prices can shave 0.5% off global GDP and raise consumer price inflation by 0.4 percentage points. For Pakistan, the stakes are even higher given its precarious fiscal situation, ongoing IMF programme, and weak social safety nets.
Within Pakistan, the impact extends across sectors. Transport and logistics face immediate fuel cost hikes, affecting everything from public commuting to farm-to-market supply chains. Manufacturing-already recovering from previous years of downturn-may face input cost escalation. Agriculture, dependent on diesel for tractors and tube wells, will also bear the brunt, threatening food prices and farmer profitability. The cumulative effect risks reversing the recent decline in inflation and undermining consumption-led recovery.
In monetary terms, inflation could rise by 0.5-0.7 percentage points over baseline forecasts if oil crosses $90 per barrel for a sustained period. The current account surplus, which stood at $1.9 billion as of April 2025, may turn into a deficit if import costs rise and exports remain stagnant. Pakistan’s remittance buffer, while strong at nearly $35 billion, may not be sufficient to offset rising oil bills, particularly if foreign direct investment inflows stall amid global uncertainty.
Policymakers face tough choices. One option is to reintroduce selective fuel subsidies for vulnerable groups, but this risks breaching fiscal limits. Another is to accelerate IMF negotiations for contingency support, such as oil credit lines or energy grants from bilateral partners. The government may also explore regional cooperation through organizations like ECO or the OIC to ensure secure energy routes and buffer fuel allocations.
To mitigate domestic fallout, Pakistan must act on several fronts. First, it should immediately review and strengthen strategic fuel reserves, targeting a minimum of 60 days of essential supply. Second, fiscal planners should reallocate non-essential expenditures to support targeted subsidies for agriculture and public transport. Third, the SBP must adopt a flexible monetary posture, prepared to respond to second-round inflation effects without choking growth. Fourth, diplomatic engagement with Iran and Gulf states is essential to ensure border trade continuity and avoid direct fallout.
The conflict also highlights the need for long-term structural reforms. Pakistan must diversify its energy mix, expand investment in solar and wind projects, and reduce its dependence on imported hydrocarbons. Strengthening the domestic refining sector, liberalizing the energy market, and investing in LNG storage and pipeline infrastructure will be crucial in building long-term resilience.
The writer, a chartered accountant and certified business analyst, is serving as a CEO for Model Bazaars.