By: Piyush Verma
Within weeks of the outbreak of strikes on Iran by U.S. and Israeli forces, and Iran’s effective closure of the Strait of Hormuz, Brent crude prices surged past $110 a barrel, eventually peaking near $120 as the conflict threatened to sever one-fifth of the world's traded oil and gas supply. Tankers scrambled to reroute around the world's most critical maritime chokepoint, freight rates spiked, and governments around the world began crisis calculations they had long hoped to avoid. The conflict in West Asia was not South Asia's war. But South Asia — and particularly the smaller South Asian states such as Nepal, Bangladesh, and Bhutan — are paying the price in fuel queues, kitchen economies, and fiscal wounds that will take years to heal.
The arithmetic of dependency is stark, even for a larger country like India. India imports nearly 88% of its crude oil, with a significant portion of those supplies — including virtually 55-65% of its liquefied natural gas (LNG) imports and 90% of liquefied petroleum gas (LPG) imports — transiting the Strait of Hormuz. Bangladesh's garment factories, Sri Lanka's transport networks, and Nepal's cooking cylinders also all depend on petroleum flowing through the Strait of Hormuz. One of the Indian subcontinent’s biggest structural vulnerabilities is that decades of growth have been built on imported hydrocarbons, with inadequate storage, thin fiscal buffers, and no credible alternative supply chain.
The consequences have been immediate and deeply unequal across the region. Nepal's national oil corporation is losing approximately $52 million every fortnight, with fuel rationing now affecting remote communities that depend entirely on imported energy. Sri Lanka’s cooking gas cylinders cost roughly a third more than at the start of the year, reviving memories of the 2022 economic crisis. Across South Asia's most import-dependent economies, petrol, and diesel prices have risen up to 60%. The World Bank has called this the largest energy price surge since 2022, projecting a 24% annual rise in global energy prices for 2026.
India stands out in some important ways. Indian petrol prices rose only 3.9% and diesel 4.3% in the same period. This is not because India is less exposed; it is because India chose to absorb the crisis through state oil companies, which are reportedly losing approximately 100 rupees per liter on diesel alone. The government has protected consumers — for now — but it has done so by accumulating a fiscal liability that four rounds of price hikes in May 2026 have only begun to acknowledge. India's insulation is real but fragile, purchased on borrowed time and borrowed money. It is a testament to institutional capacity — but also a warning that even the region's most resilient economy cannot indefinitely absorb shocks that the current energy architecture was never designed to withstand.
Beyond pump prices lies a second wound: remittances. South Asia's economies are not only energy-dependent on the Gulf — they are also labor-dependent. India received a record $135 billion in remittances in FY 2024–25, nearly 38% from the GCC. Across the region, Gulf remittances form the backbone of household consumption and foreign exchange stability — Bangladesh alone received over $30 billion, nearly half from the Middle East, while other South Asian economies are similarly exposed. These inflows are not luxuries — they are the load-bearing columns of balance-of-payments stability. A prolonged conflict that disrupts Gulf construction, hospitality, and logistics employment would trigger a secondary shock that fuel price data does not yet capture. Tens of millions of workers from India, Bangladesh, Nepal, and Sri Lanka in Gulf countries are one escalation away from displacement — and their remittance-dependent families back home have no safety net.
Why does this matter to Washington? Because this crisis is arriving precisely when South Asia's strategic landscape is most consequential for U.S. interests. Several economies in the region — including Sri Lanka and Bangladesh — are navigating IMF programs and debt restructuring with depleted reserves. Prolonged energy shocks risk political instability in countries where that instability has regional and global implications. More fundamentally, every dollar that South Asian governments spend absorbing fuel price shocks is a dollar not invested in the infrastructure, manufacturing, and digital economy that Washington's Indo-Pacific strategy depends on. And where economic stress creates governance vacuums, China has consistently moved to fill them through debt-financed infrastructure, energy supply agreements, and port access deals that quietly redraw the region's strategic geometry. The antidote to that dynamic is not containment but resilience. Building that resilience would benefit from further U.S. engagement.
The crisis has also laid bare a troubling governance gap: India and most of its neighbors have no collective energy security architecture. There is no regional strategic petroleum reserve, no emergency coordination mechanism, no shared LNG re-gasification infrastructure. Every country is managing the shock alone, some with more capacity than others. India can absorb losses through state oil companies and strategically expand its reserves, but Nepal and Sri Lanka cannot. The asymmetry within the neighborhood is as important a story as the vulnerability South Asia shares vis-à-vis the Gulf.
What should follow from this moment? Four things. First, the United States and India — as the Indo-Pacific's two most consequential democracies — have a shared interest in building South Asia's energy resilience: fast-tracking investment, supporting emergency energy financing, and backing the United Arab Emirates–India deep-sea pipeline as a strategic infrastructure priority. Second, India's role as South Asia's largest and most resilient economy creates a natural opportunity to anchor the region's energy security through the kind of structured regional cooperation that serves India's own long-term interests. Emergency fuel-sharing frameworks and preferential supply arrangements with strategic neighbors are investments in a stable neighborhood that ultimately protects India's own growth story. Third, New Delhi should champion a regional strategic petroleum reserve framework, the kind of coordinated buffer that currently does not exist and that this crisis has proved is urgently needed. Fourth, South Asian governments must confront the politically inconvenient truth that subsidized fossil fuel consumption has created a dependency so deep that a distant conflict can destabilize household budgets from Kathmandu to Colombo in a matter of weeks.
The structural vulnerability this crisis has exposed will not resolve itself when the tensions over the Strait of Hormuz ease. This crisis is more than a warning shot. It is the shot. For the United States, strengthening the energy resilience of South Asia is a strategic imperative.
Piyush Verma is Senior Fellow for the Energy & Climate Program at ORF America.