With the Strait of Hormuz now effectively disrupted, the world is entering a new phase of energy insecurity. For Indonesia, the consequences are not hypothetical. They are already unfolding—through rising fuel costs, a weakening currency, and mounting pressure on a fragile fiscal system.

Roughly a fifth of global oil supply passes through Hormuz. Any sustained disruption sends immediate shockwaves through crude markets, and those shocks are now feeding directly into Indonesia’s domestic economy. Despite years of subsidy reform, the country remains structurally exposed to global oil price volatility. As prices climb, the government faces mounting pressure to adjust fuel prices, subsidized liquefied petroleum gas (LPG)—especially the widely used 3-kilogram cylinders—and potentially electricity tariffs. The result is a rapid escalation in the cost of living, with middle- and lower-income households bearing the brunt.

This is not merely an energy story. It is an inflation story—and a dangerous one. Indonesia is simultaneously confronting the risk of prolonged drought linked to a potential super El Niño. Agricultural output is under threat just as fertilizer prices rise due to disruptions in petrochemical supply chains and surging logistics costs.

The convergence of energy inflation and food inflation is a volatile mix, one that has historically triggered social and economic instability across emerging markets.

The convergence of energy inflation and food inflation is a volatile mix, one that has historically triggered social and economic instability across emerging markets.

Fiscal pressures are intensifying in parallel. Indonesia’s energy subsidy and compensation system remains highly sensitive to global price movements and exchange rate fluctuations. As oil prices rise, so too does the cost of maintaining price stability domestically. A weakening rupiah compounds the problem, increasing the cost of imported fuel and swelling subsidy obligations. Even modest currency depreciation can add billions of dollars in additional government spending, rapidly narrowing fiscal space.

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The real danger lies in the interaction of these shocks. Rising oil prices tend to coincide with capital outflows from emerging markets, placing further downward pressure on the currency. In such a scenario, Indonesia faces a dual burden: higher energy import costs and a more expensive fiscal response. Scenario-based estimates suggest that the combined impact could reach tens of billions of dollars, forcing difficult trade-offs between maintaining subsidies, protecting social spending, and preserving fiscal credibility.

The external sector is already feeling the strain. Industries reliant on imported inputs—ranging from manufacturing and automotive production to food processing and petrochemicals—are confronting higher costs as the rupiah weakens and global prices rise. These pressures will inevitably be passed through to consumers, reinforcing inflationary trends and eroding purchasing power.

To be sure, Indonesia may benefit from higher global commodity prices. Exports of coal, palm oil, and nickel are likely to generate additional revenue. But such windfalls are uneven and slow to reach households. They are unlikely to offset the broad-based increase in living costs now underway.

This places the burden squarely on policy. The challenge is not simply to respond, but to respond wisely. Expanding the fiscal deficit to accommodate rising subsidies may offer short-term relief but risks locking Indonesia into a cycle of higher debt and rising interest payments at a time of tightening global financial conditions. Redirecting spending from lower-impact populist programs toward targeted interventions would be more effective.

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One such intervention is public transportation. Subsidizing mass transit can provide immediate relief to urban households while reducing fuel consumption—addressing both inflation and energy demand simultaneously. By contrast, blunt instruments such as work-from-home mandates are unlikely to gain traction in the private sector without costly incentives.

At the same time, the crisis underscores a deeper structural imperative: energy resilience.

Indonesia’s continued reliance on imported fuel leaves it vulnerable to precisely this kind of external shock. Accelerating investment in renewable energy—particularly large-scale solar deployment in regions still dependent on diesel generators—would reduce that vulnerability over time.

Indonesia’s continued reliance on imported fuel leaves it vulnerable to precisely this kind of external shock. Accelerating investment in renewable energy—particularly large-scale solar deployment in regions still dependent on diesel generators—would reduce that vulnerability over time.

A serious push toward expanding solar capacity, potentially reaching 100 gigawatts, is no longer a matter of environmental ambition but of economic necessity.

Leadership will determine whether Indonesia weathers this crisis or deepens its exposure. President Prabowo Subianto faces a critical test. This is not the moment to press ahead with campaign-era priorities that offer limited support to household purchasing power. The focus must shift decisively toward controlling inflation, protecting the most vulnerable, and maintaining fiscal discipline.

Even if tensions in the Middle East ease, the economic aftershocks of this crisis will linger. Energy shocks have a way of embedding themselves in inflation expectations, fiscal balances, and political stability. For Indonesia, the lesson is stark: resilience cannot be improvised in the midst of crisis. It must be built through disciplined policy, strategic investment, and a willingness to confront hard choices before they become unavoidable.

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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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