The new round of conflict between the United States, Israel, and Iran is not a distant story confined to the Middle East. It carries immediate risks for economies across Asia, none more vulnerable than Indonesia’s. The economic fallout is already visible. If the crisis persists, the consequences could reshape fiscal policy, corporate balance sheets, and everyday prices for Indonesian households.

Oil markets have responded sharply. Crude prices climbed after U.S. and Israeli strikes on Iran in early 2026, jumping more than 10 percent in a matter of days and trading near multi‑month highs. Analysts warn that Brent crude could surge to $100 per barrel or more if tensions disrupt flows through the Strait of Hormuz, the narrow chokepoint that handles roughly 20 percent of the world’s oil exports. 

For Indonesia, this is not an abstract energy story. The country remains a net importer of crude oil and finished fuels.

A sudden spike to $100–$120 per barrel would hit the state budget hard. Government simulations show that each $1 per barrel rise above the budget assumption adds roughly Rp10.3 trillion to public spending.

A sudden spike to $100–$120 per barrel would hit the state budget hard. Government simulations show that each $1 per barrel rise above the budget assumption adds roughly Rp10.3 trillion to public spending.

Under a $100 to $120 oil price scenario, the additional demand on the budget could exceed Rp500 trillion in 2026. That figure includes higher fuel subsidies, extra compensation to the state energy firm Pertamina, and greater subsidy costs for electricity. 

Those numbers matter for everyone. Indonesia’s fiscal policy is not designed to absorb such large, sudden shocks without cutting spending elsewhere or raising taxes. Higher energy import bills could reduce investment in infrastructure, education, and health at a time when the government is already navigating slower global growth.

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The supply shock also comes at a moment of heightened fear in global financial markets. Investors tend to reduce risk exposure when geopolitical tensions rise, seeking the safety of U.S. Treasuries and other haven assets. For Indonesia, that dynamic can mean weaker capital inflows and downward pressure on the rupiah. A weaker rupiah makes dollar‑denominated imports more expensive, pushing up inflation for food items like wheat, soybeans, and meat that rely on global supply chains. 

The risk of “imported inflation” is real. Households already struggle with high prices for basic goods. Transport fuel costs are a large share of household consumption in urban areas. When crude prices rise, refinery margins often widen as well, nudging up retail prices for gasoline and diesel. That hits both commuter costs and freight rates, adding to food prices from farm gate to market. Rising food inflation tends to hit lower‑income families hardest because they spend a larger share of income on essentials.

The energy shock could spill into broader inflation expectations. If price pressures accelerate, Bank Indonesia may feel compelled to tighten monetary policy to protect the currency and anchor inflation. Higher interest rates on top of fiscal strain reduce support for private investment. In worst‑case scenarios, growth stalls precisely when the economy needs resilience.

There is also a broader strategic angle. Global supply disruptions have already forced some shipping companies to reroute tankers and raise war‑risk premiums on insurance for vessels passing near the Gulf. Higher logistics costs will filter into prices for manufactured inputs as well as consumer goods. That adds to the inflationary pressure already felt from exchange rate weakness and higher commodity costs. 

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Indonesia’s policymakers cannot treat this as a remote Middle East problem. The government must sharpen contingency planning. That includes strengthening fiscal buffers and reforming energy subsidy frameworks that have historically created rigid budget commitments. It also means diversifying import sources, building strategic reserves, and hedging currency and commodity exposures where possible. Strategic cooperation with energy producers outside the Middle East and accelerated development of domestic refining capacity could reduce dependence on volatile global markets over time.

The immediate task for Indonesia’s finance and energy ministries is to prevent an acute price shock from turning into a broader economic crisis. Past experience shows how fragile markets can react to prolonged geopolitical stress. Without proactive policy measures, higher oil prices could erode consumer purchasing power, squeeze public finances, and slow growth in a country still navigating demographic and infrastructure transitions.

The stakes are high. A shooting war thousands of miles away should not translate into higher living costs, fiscal turbulence, and weaker growth at home. But without clear, coordinated action from Jakarta, that is exactly what could happen. Indonesia must act now to cushion its economy from the ripple effects of a global energy shock triggered in the Persian Gulf. Otherwise the cost will be paid not by distant capitals but by ordinary families and businesses here.

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The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.

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