Oil prices surge after US attacks Iran: What it means for Bangladesh’s economy

Infographic: TBS

Global oil markets were rattled over the weekend following US airstrikes on Iranian nuclear sites — a move that could escalate tensions in the already fragile Middle East and potentially upend global energy flows. 

For a fuel-import dependent country like Bangladesh, the developments come at a time when macroeconomic conditions are already under strain.

WTI crude oil futures (August 2025 contract) surged to $75.93, up $2.09 or 2.83% in a single session. Global benchmark Brent crude jumped to $78.81, marking a 2.34% increase. Earlier in the day, Brent touched $81.10, reflecting market panic before stabilising.

The spike follows an unprecedented announcement by US President Donald Trump confirming airstrikes on three key Iranian nuclear facilities — Fordow, Natanz and Isfahan — amid rising hostilities between Iran and Israel. The strikes represent the first open US military intervention in the regional conflict, prompting fears of full-blown warfare.

In response, Iran's foreign minister issued a stern warning, stating Tehran "reserves all options" to defend its sovereignty. Analysts fear retaliation could include disrupting shipping through the Strait of Hormuz, the world's most critical oil chokepoint. 

Approximately 20 million barrels per day — nearly 20% of global oil trade — passes through this narrow waterway. A blockade could push prices past $100 per barrel, triggering global economic ripple effects.

Bangladesh: A net importer at risk

Bangladesh is highly vulnerable to oil price volatility due to its heavy dependence on imported energy. The country imports LNG, crude oil, and refined fuels to meet its growing energy demand for industry, transport, and power generation.

In FY2023–24, Bangladesh imported 248 billion cubic feet of LNG, equivalent to 44.26 million barrels of oil, at an assumed crude price of $74, costing around $3.28 billion. A $10 increase in price would add approximately $442.7 million to this bill, while a $20 increase would raise the cost by $885.3 million. Crude oil imports stood at 1.3 million tonnes (9.58 million barrels), costing $709.7 million — with a $10 increase adding $95.9 million, and a $20 increase adding $191.7 million. 

Refined oil imports totalled 4.39 million tonnes (32.16 million barrels), valued at $2.48 billion. Here, a $10 increase in prices would add $321.6 million, and a $20 increase would push the bill up by $643.3 million. 

Furnace oil imports amounted to 661,000 tonnes (4.84 million barrels), with a current value of $373 million; the added burden from a $10 and $20 price hike would be $48.4 million and $96.9 million respectively.

Altogether, Bangladesh's total energy import bill stands at approximately $6.84 billion. A $10 increase in global oil prices could inflate this by over $900 million; a $20 rise could double that impact to $1.82 billion — a massive fiscal and external shock for an economy still grappling with the aftershocks of the pandemic and global inflation.

Economic fallout: What could go wrong?

Pressure on foreign exchange reserves is one of the immediate concerns. After months of decline, the Bangladesh Bank had made progress in stabilising its forex reserves under new leadership. However, sustained pressure from higher oil prices could reverse these gains. 

The increased dollar demand for oil payments — typically settled via Letters of Credit — could prompt the central bank to inject more USD into the market to stabilise the taka. This would weaken the exchange rate, widen the current account deficit, and further reduce the country's already fragile import coverage ratio.

Rising inflationary pressures are another critical concern. Higher oil prices feed directly into the cost of transport and manufacturing. As oil is a key input in logistics, fertiliser production, electricity generation, and food transportation, the impact is felt widely. 

Given that Bangladesh's consumer price index (CPI) is already elevated due to prior commodity shocks and currency depreciation, another surge in fuel costs could undermine the central bank's recent monetary tightening efforts. Poor and fixed-income households would suffer the most.

Fiscal stress and the subsidy dilemma are also looming. The Bangladesh Petroleum Corporation (BPC) and the Power Development Board (PDB) depend heavily on government subsidies to keep energy affordable.

If global fuel prices remain elevated, the government's subsidy burden could swell by several hundred million dollars. Policymakers face two politically sensitive options: raise fuel prices — an unpopular move — or absorb the extra cost through subsidies, worsening the budget deficit. Moreover, if power tariffs are not adjusted promptly, the BPDB's operational losses will continue to grow.

Balance of payments risks are likely to re-emerge. In FY 2023–24, Bangladesh had seen modest improvement in its current account due to rising remittances and export growth. 

However, the steep rise in oil costs could reverse this trend and plunge the trade balance back into deeper deficit territory, unless matched by stronger export earnings or concessional financing inflows.

Global context: Why this matters more now

The Middle East has always been a flashpoint for oil market instability, but this time the risks are amplified. 

Direct US military involvement signals a deeper level of confrontation. Iran's control over the Strait of Hormuz gives it enormous leverage in disrupting global oil supplies. 

Additionally, major global importers like China, India, and the European Union are all heavily reliant on imported oil. As they compete for limited supply, prices are likely to rise further — aggravating the situation for smaller, vulnerable economies like Bangladesh.

What can Bangladesh do?

In the short term, Bangladesh can explore fuel rationing or adopt tiered pricing to prioritise supply for essential sectors such as agriculture and transport. The government could also consider temporary tax relief, such as cutting fuel duties or VAT, to ease the burden on consumers.

In the medium term, the country must focus on diversifying its energy sources. Expanding LNG terminal capacity, investing in cross-border electricity trade — for example, importing hydroelectricity from India or Bhutan — and accelerating solar and hybrid infrastructure can provide more stable alternatives. 

The government can also look into refinancing energy subsidy bills through concessional financing or IMF-aligned support to ease the fiscal strain. Additionally, currency hedging instruments should be considered to manage risks associated with oil and foreign exchange volatility, particularly for large public-sector energy buyers.

Vigilance and preparedness key

The latest oil price shock underscores how closely Bangladesh's economic health is tied to global geopolitics. While there's a chance the crisis could de-escalate if Iran refrains from retaliating, the risk of prolonged disruption remains significant.

For policymakers in Dhaka, this should serve as a wake-up call. Contingency planning, prudent fiscal management, and smart diplomacy will be essential in navigating the challenges ahead.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.