Economies like Sri Lanka which are exposed to external vulnerabilities due to its weaker currency, limited fiscal space, and a dependence on imports, offer signs of potential global demand destruction, owing to the effects of the war in the Middle East, particularly due the closure of the Strait of Hormuz, Atlantic Council Global Energy Centre Nonresident Senior Fellow Phillip Cornell wrote, last Friday (20).

“Economies like Sri Lanka are particularly exposed due to weaker currencies, limited fiscal space, and dependence on imports,” Cornell said, referring to Sri Lanka’s ongoing energy and fuel imports crisis, which has led to a Government-mandated four-day work week, a 25% hike in fuel prices, and rationing of fuel consumption through a QR-code system. 

“Rationing and demand suppression can provide temporary relief, but perceptions and expectations of duration are already causing changes in behaviour,” he said, noting what the measures taken by governments across the world may lead to in the long term. “Perhaps the most important development is that demand destruction is already underway,” he concluded.

On Monday (23), Iran’s Islamic Revolutionary Guard Corp (IRGC) threatened complete closure of the strategic passage for at least 20% of global oil and gas, in the event that the US military follows through on President Donald Trump’s threat to attack Iranian power plants. The Strait has effectively been closed since early March following attacks on commercial vessels, which has since driven up shipping, insurance costs, and global oil prices even higher.

President Trump provisionally walked back on his threat to target Iranian power plants and infrastructure on Monday (23) in a Truth Social post, offering a five-day respite, subject to the “success” of ongoing discussions with Iranian officials.

Iranian officials however have denied holding talks with the US, refuting the US President's remarks of a “productive conversation” taking place.

Referencing a recently published JPMorgan analysis, Cornell explained that Asian shipments of refined fuel products have dropped dramatically in recent times, with the possibility of global oil demand dropping by around one million barrels per day.  “The Financial Times, citing JPMorgan analysis, shows that refined fuel shipments in Asia have fallen by 30-35%, while global oil demand could drop by around one million barrels per day as a result of both price increases and policy measures. The speed of adjustment makes the current crisis unique.”

He contrasted Sri Lanka’s ongoing crisis with its debt default crisis back in 2022, highlighting that the escalation of the present crisis, in a short period of time, is due to blockage of global oil and gas flows at the Strait of Hormuz maritime chokepoint.

“During the 2022 energy shock following Russia’s invasion of Ukraine, for example, the effects unfolded over months as supply chains reoriented. In this case, disruption to a central maritime artery has compressed the timeline. Physical shortages, policy responses, and economic contraction are occurring in rapid succession.” 

He noted that along with Sri Lanka, other countries in Asia have resorted from moving to conserve energy, to then restricting demand. “Sri Lanka is just a small example of the energy havoc spreading around the world. Within days of the conflict’s outbreak and the disruption in the Strait of Hormuz, much of South and Southeast Asia have moved from price pressure to physical constraint.”

Last week, Sri Lankan officials said that the Government is looking to introduce additional fuel‑rationing measures, in addition to purchasing more oil. 

Beyond Sri Lanka’s fuel crisis, like most nations in Asia, its oil and gas imports are also facing shortages due to the restriction of shipping through the Strait of Hormuz. ”Asia is particularly reliant on oil and gas from the Gulf, with around 60% of its crude oil imports and nearly a third of its liquefied natural gas (LNG) moving through the strait. Almost all countries in the region import most of their fuel and gas, and some only have enough supplies to last a few more weeks,” Cornell wrote. 

“Several Southeast Asia-based refineries, including facilities in Singapore and Malaysia, have cut back ‌output due to constrained crude availability. Panic fuel-buying has spread to the Philippines, Indonesia, Thailand, Vietnam, and Myanmar. Household reliance on imported LPG is on another scale altogether in India, where hundreds of millions of customers wait for days to replace canisters.”