Shipping disruptions in the Strait of Hormuz have exposed the vulnerability of South Asia's energy security to geopolitical instability in the Persian Gulf. The strait, which carries roughly one-quarter of global seaborne oil trade and around one-fifth of global liquefied natural gas (LNG) shipments, remains one of the world's most critical energy chokepoints.
Since February 2026, the conflict in the Middle East has repeatedly disrupted these flows, exposing many South Asian economies’ heavy dependence on imported oil, gas, and fertilizer from the Persian Gulf. The resulting supply uncertainty has raised the region’s energy costs, increased these states’ import bills, and put pressure on their public finances and foreign exchange reserves.
The impact of the crisis across South Asia has varied according to differing levels of import dependence, fiscal space, energy diversification, and external buffers. At the start of the conflict, India was in a relatively stronger position as government intervention and state-run oil marketing companies provided an initial cushion against the immediate shock. As the disruption persists, however, the country is facing rising energy costs and broader economic pressures.
Bangladesh, supported by emergency World Bank financing, and Pakistan, operating under an International Monetary Fund-supported programme, are experiencing renewed external pressures as higher energy import bills strain foreign exchange reserves, public finances, and energy supplies. Sri Lanka is also managing the shock through rationing and IMF funding, though the episode has reinforced its continued vulnerability following its 2022 economic crisis. The region’s smaller economies — Bhutan, the Maldives, and Nepal — have been affected primarily through fuel-import dependence and limited external buffers.
For Canada, this crisis provides a broader and longer-term strategic opening. As South Asian countries diversify their energy sources and supply chains, Canada can deepen its economic presence in this region through energy exports, fertilizer trade, and infrastructure and financing partnerships that strengthen regional energy security.
How is the Middle East crisis impacting South Asian countries?
India
India is the world's third-largest energy consumer, importing about 89 per cent of its crude oil, roughly half of its natural gas, and about 60 per cent of its liquefied petroleum gas (LPG). For nearly two months after the Middle East conflict began, the country absorbed the shock without allowing it to translate into higher retail fuel prices. India’s ability to withstand the shock is the result of its supply diversification, fiscal capacity, and policy intervention. Between 2022 and early 2026, India expanded its crude sourcing from 21 to 41 countries, with discounted Russian oil and revived Venezuelan imports providing critical non-Gulf sources. A U.S. Treasury waiver issued on March 6, 2026, allowed Russian crude to continue to flow to India, with New Delhi indicating that future Russian oil purchases would depend on price, availability, and security of supply.
By May 11, 2026, however, the government’s tone had become more cautious. India’s minister of petroleum and natural gas stated that India held the equivalent of roughly 60 days of crude oil, 60 days of natural gas, and 45 days of LPG in inventories, while state-owned oil marketing companies were absorbing losses of nearly INR 1,000 crore (US$105 million) per day.
This suggested that the shock was relatively contained, but at a cost. By May 2026, the Indian rupee had fallen more than five per cent since the onset of the conflict, fertilizer plants were receiving only around 70 per cent of their gas requirements, and Indian Prime Minister Narendra Modi was urging households and industry to conserve energy and reduce import-intensive consumption. These measures point to a co-ordinated government effort taken to curb demand, conserve foreign exchange, and prevent external pressure from spilling fully into domestic prices.
As efforts to manage the disruption continue, the crisis highlights the potential for deeper energy co-operation with Canada. In 2025, Canadian petroleum oil and gas exports to India accounted for only about 0.01 per cent of Canada’s total exports in these categories, with most Canadian crude still flowing to the U.S. Fertilizer trade, however, was somewhat larger, with India accounting for about four per cent of Canada’s fertilizer exports.
While Canadian LPG is predominantly propane-rich, unlike the butane-heavy blend commonly used in India's residential market, over the medium to long term, there is an opportunity to align India’s blending and processing capabilities with Canadian supplies. Expanding energy infrastructure, export capacity, and renewed momentum in Canada–India economic engagement could create space for deeper co-operation in crude oil, LNG, and LPG, thereby bolstering India’s energy security.
Bangladesh
Bangladesh, with its population of more than 175 million, remains highly vulnerable to energy shocks, importing about 95 per cent of its oil and 30 per cent of its gas. Imports account for nearly two-thirds of the country’s total primary energy, up from 47.7 per cent in FY 2020–21 to 62.5 per cent in FY 2024–25. At the same time, renewable energy, including hydropower, accounts for just 2.3 per cent of grid-based power generation, leaving the country exposed to fossil fuel supply and price volatility.
This dependence is amplified by Bangladesh’s reliance on the Middle East. Around 63 per cent of crude oil is sourced from Saudi Arabia, the United Arab Emirates, and Iraq, while Qatar alone accounts for roughly 64 per cent of the country’s LNG imports. The result has been prolonged power cuts, fertilizer plant shutdowns, and disruptions to the garment sector — which accounts for roughly 80–85 per cent of exports — with factories operating at 40–50 per cent capacity in April.
The fiscal response has relied increasingly on external financing. Since March 2026, Bangladesh has sought over US$2 billion in emergency support from multilateral institutions and is negotiating an additional US$1-billion-plus loan for refinery expansion. The World Bank has approved US$350 million to support LNG imports and approved a further US$1.1-billion emergency financing package to help Bangladesh manage energy, food, and fertilizer pressures. In parallel, Dhaka has moved to diversify its energy partnerships, expanding energy co-operation with the U.S., advancing nuclear development at the Rooppur plant with Russia’s Rosatom, and broadening its fuel import base across multiple regions.
Bangladesh is also placing greater emphasis on renewable energy to reduce its import dependence and ease pressure on foreign exchange reserves. The government has set a target of achieving 10,000 MW of solar power generation capacity and has actively invited foreign investment into the sector, including from Canada.
For Canada, there is a clear opportunity to engage beyond hydrocarbons, namely, through investment, technology transfer, and project development in renewables. Fertilizer trade is another opportunity, with Bangladesh accounting for about two per cent of Canada’s fertilizer exports, as natural gas shortages continue to affect domestic fertilizer production and increase reliance on imported fertilizer.
Pakistan
For Pakistan, South Asia’s second-most populous country (at more than 250 million), the Hormuz crisis has exposed deep vulnerabilities in an energy system already under significant fiscal and structural strain. The country imports around 86 per cent of its energy requirements, including more than 80 per cent of its oil. It also sources over 60 per cent of its LPG from Iran, while Qatar and the United Arab Emirates together account for roughly 99 per cent of its LNG imports. This leaves Pakistan highly exposed to disruptions in Gulf energy markets, volatile fuel prices, and persistent foreign-exchange pressures.
As recently as January 2026, Pakistan was managing an LNG surplus as rapid rooftop solar adoption reduced grid demand. The Hormuz disruption quickly reversed this position, shifting the country from a surplus position to emergency supply management amid rising import costs. Prime Minister Shehbaz Sharif stated that Pakistan’s weekly oil import bill increased from roughly US$300 million before the crisis to about US$800 million after the disruption, placing sharp pressure on the balance of payments.
The government’s response has focused on demand management, supply diversification, and fiscal containment. Measures include reduced public-sector working hours, remote work arrangements, and temporary school closures to curb energy consumption. Islamabad has also signalled plans to increase oil imports from Russia to help diversify its supply sources. However, the country’s ability to cushion the blow to consumers is constrained by its US$7-billion IMF programme and persistent circular debt in the power and gas sectors.
Notably, Pakistan’s rooftop solar expansion provided a critical buffer during the crisis. The country has imported roughly 45 GW of solar panels over the past five years, helping reduce grid demand and dependence on imported LNG. However, the shift from net metering to net billing in February 2026, driven by policy changes that reduced the compensation consumers receive for surplus electricity exported to the grid, has weakened incentives for new rooftop solar adoption, potentially slowing one of Pakistan’s most effective tools for improving energy security and reducing import dependence.
With Canada's oil and gas exports to Pakistan accounting for just 0.001 per cent of its global exports of these products in 2025, there is considerable scope to expand bilateral energy trade over the medium to long term. Opportunities also exist to grow Canada’s fertilizer exports, currently about 0.14 per cent of Canada's total exports to Pakistan, and deepen co-operation in renewable energy. Recent progress and announcements during the July 20, 2026, meeting between Canadian Foreign Affairs Minister Anita Anand and Pakistan’s Deputy Prime Minister and Foreign Minister Mohammad Ishaq Dar, including Canadian company JCM Power’s 240-MW Dhabeji Hybrid Wind-Solar Project in partnership with K-Electric, highlight the potential for greater Canadian investment in expanding Pakistan’s renewable energy capacity.
However, fiscal constraints, foreign exchange pressures, and the ongoing IMF programme are likely to constrain the pace of broader trade and investment expansion in the near term.
Sri Lanka
Sri Lanka, which imports roughly 60 per cent of its energy, has negligible natural gas imports, leaving households heavily dependent on imported LPG — historically sourced mainly from Iran — to meet domestic demand. The country remains under the IMF Extended Fund Facility signed after its 2022 sovereign default, with public debt at roughly 101 per cent of GDP and fuel storage capacity of less than a month.
The Hormuz disruptions have revived familiar emergency measures. On March 15, President Anura Kumara Dissanayake reintroduced the Fuel Pass QR code rationing system — developed during the 2022 crisis to control fuel purchases — and declared every Wednesday a public holiday for those working in the state sector. Since the start of the Hormuz crisis, petrol prices have risen by about 48 per cent, while electricity prices rose 18 per cent to align with IMF cost-recovery targets. Meanwhile, since early March, the Sri Lankan rupee has depreciated by about 8.7 per cent against the U.S. dollar.
The disruption has been compounded by an El Niño event, which is forecast to reduce hydropower generation by 127 GWh in the coming months, forcing greater reliance on imported fossil fuels for power generation. Fertilizer supply disruptions have added pressure on food security for key cropping seasons. In response, Colombo has prioritized the diversification of its supply sources rather than fiscal subsidies, which are constrained under the IMF programme. Colombo is also in advanced talks to purchase Russian crude for its sole refinery and refined products from both Russia and China, using a temporary U.S. sanctions waiver and settling Russian transactions in Chinese renminbi.
For Canada, direct energy trade with Sri Lanka remains minimal and is unlikely to expand significantly in the near term given the latter’s fiscal constraints. However, Saskatchewan's potash exports remain a relevant input for Sri Lanka's agricultural resilience, while engagement through multilateral institutions such as the IMF and the Asian Development Bank (ADB) can support energy infrastructure and renewable energy development. Sri Lanka's exposure to fuel import dependence, climate-driven hydropower variability, and constrained fiscal space underscores the need for Canada to complement bilateral trade with broader multilateral engagement.
Bhutan, the Maldives, and Nepal
The experiences of Bhutan, the Maldives, and Nepal highlight the uneven impact of a shared external energy shock on smaller South Asian economies.
In 2023, Nepal derived nearly all its electricity from hydropower, which accounted for 99 per cent of generation that year. Currently, the country has no domestic oil production and relies almost entirely on India for petroleum fuels. This has exposed the country to global price shocks and a tightening of supply in India. One month into the crisis, aviation fuel prices had nearly doubled, LPG cylinders were being half-filled, and the government had extended the weekend from a single Saturday holiday to a two-day weekend.
Bhutan is similarly reliant on hydropower for domestic electricity needs but remains exposed through imported transport fuels and fertilizers routed via India from Gulf suppliers.
The Maldives is the most exposed of the three cases, with near-total dependence on imported fuel and public debt at around 130 per cent of GDP. Tourism-dependent growth has also declined sharply, falling from 5.4 per cent to one per cent this year, according to the ADB. In response to fuel constraints, the country secured additional supplies through arrangements with China in May 2026.
What are the common trends across the region?
South Asian states have exhibited a set of broadly similar structural pressures and policy responses to the Middle East crisis.
First, demand suppression has emerged as a default policy tool. Pakistan and Sri Lanka introduced shortened workweeks, and Nepal similarly expanded its weekend from one to two days. Sri Lanka declared midweek public holidays, and Bangladesh closed universities early. India encouraged households to shift peak electricity use to off-peak hours and accelerate rooftop solar adoption.
For fiscally stretched governments, suppressing demand proved faster and more feasible than expanding supply. This pressure was further compounded by El Niño-linked heat and rainfall disruptions, which increased electricity demand while simultaneously threatening hydropower generation in Bhutan, Nepal, and Sri Lanka.
Second, macroeconomic impacts were felt through currency depreciation and inflation. From late February to early June 2026, Bhutan, India, Nepal, and Sri Lanka all experienced notable currency depreciation, while Pakistan and the Maldives remained comparatively stable due to external support and currency arrangements, respectively. Inflation also rose across much of the region, with the sharpest increases in Pakistan and Bangladesh, while the Maldives was an exception, entering deflation by April 2026. These trends underscore how the energy shock translated into broader macroeconomic pressures.
Third, the region is diversifying its energy sources away from the Persian Gulf. India has expanded its crude import base to more than 40 countries. Bangladesh has begun diversifying fuel suppliers and import routes, including sourcing crude oil from Saudi Arabia and refined diesel imports from India. Pakistan has similarly widened its sourcing, including imports from the U.S., Russia, Venezuela, and Saudi Arabia, while the Maldives has secured fuel supplies through Chinese export arrangements. While these shifts signal a gradual rebalancing of supply chains, the Persian Gulf will remain critical to the region’s energy security.
Fourth, external financing and multilateral support have become structural features of crisis management. Bangladesh sought additional multilateral financing, including over US$1.4 billion in World Bank support for energy imports and essential food supplies, while Pakistan relied on its IMF-supported US$7-billion programme as balance-of-payments pressures intensified. Sri Lanka continued to draw on IMF support and ADB assistance to stabilize energy and external accounts, while Nepal also received IMF funding under its existing programme. India, by contrast, relied on its large foreign exchange reserves, diversified energy supplies, and domestic policy measures to manage the shock. These differing responses highlighted the importance of fiscal and external buffers in absorbing energy shocks.
Fifth, fertilizer emerged as a slower-moving yet critical vulnerability. Roughly one-third of global fertilizer trade passes through the Strait of Hormuz, and South Asia remains among the most fertilizer-intensive agricultural regions in the world. Bangladesh’s Boro rice season and India’s kharif planting cycle became key pressure points in the second half of 2026. While energy shocks dominated immediate policy responses, the implications for food security are increasingly significant and structurally longer-term.
South Asia entered 2026 with limited buffers against external shocks. Heavy dependence on Gulf energy supplies, once viewed as a cost-efficient arrangement, has increasingly revealed itself as a structural vulnerability under conditions of geopolitical disruption. While the 2026 crisis did not create these weaknesses, it certainly exposed the extent of this vulnerability.
What might Canada's role be in South Asia's medium- and long-term energy future?
South Asian countries import between 60 and 100 per cent of their oil and gas, leaving them heavily dependent on the Persian Gulf. The 2026 crisis showcased how disruptions in regional energy markets can quickly translate into inflationary pressure, currency depreciation, foreign exchange reserve drawdowns, and slower growth. While the immediate disruption has eased, its implications for energy security will persist well beyond the crisis itself.
This is where Canada’s emerging energy export infrastructure becomes strategically significant. LNG Canada’s facility in Kitimat, British Columbia, is already operating with an annual capacity of 14 million tonnes, with Phase 2 expected to double output to 28 million tonnes by the early 2030s. From Canada’s west coast, LNG cargoes reach North Asia in roughly 10 days via stable shipping routes that bypass the Strait of Hormuz and other contested chokepoints.
Similarly, planned west-coast pipeline and export expansions are intended to strengthen Canada’s access to Indo-Pacific markets through non-Hormuz routes. In parallel, Saskatchewan’s potash sector — already the world’s largest — positions Canada as a potential supplier of critical fertilizer inputs at a time when Persian Gulf supply disruptions have worsened agricultural vulnerabilities across South Asia.
For Canada, realizing this opportunity will depend less on resource availability than on execution. Expanding port capacity, strengthening rail and pipeline connectivity across Canada, ensuring timely regulatory approvals, and securing long-term offtake agreements will be central to converting potential into sustained trade flows. The strategic alignment is clear: Canada is seeking to diversify its export markets just as South Asian economies are seeking to diversify their energy supply chains.
The 2026 crisis has created a narrow yet significant window for Canada to position itself as a long-term energy and economic partner in the Indo-Pacific. Whether this opportunity is captured will depend on how quickly Canada translates strategic intent into infrastructure, agreements, and sustained engagement across the region.
- Edited by: Erin Williams, Director, Programs, and Ted Fraser, Senior Editor
