The Energy Crisis Is Evolving Into a Currency Crisis

Looking at the list of the worst-performing currencies since the United States and Israel went to war with Iran, a striking yet unsurprising pattern emerges: nearly all of them belong to energy-importing countries.

The currencies that have fallen the most include the Egyptian pound, Philippine peso, South Korean won, and Thai baht. Meanwhile, a handful of currencies that have risen—such as the Brazilian real, Kazakhstani tenge, and Nigerian naira—are from major oil-exporting nations.

This phenomenon signals the next phase of the current energy crisis. Since the closure of the Strait of Hormuz, major oil-importing countries have not only been depleting their crude oil reserves but also eroding their fiscal buffers. To mitigate the economic impact of rising crude oil prices, governments around the world have implemented tax cuts and lifted road fuel subsidies. As import prices for oil and natural gas soar while export revenues fail to grow in tandem, foreign exchange reserves in these countries are shrinking rapidly.

We may be approaching a critical turning point. As the world’s third-largest oil importer, Indian Prime Minister Narendra Modi has called on citizens to limit fuel consumption and raised import duties on gold and silver to maintain balance of payments. He stated on Sunday: “Now is the time for us to use petrol, diesel, and natural gas cautiously. We must strive to use only the fuel that is necessary to save foreign exchange.”

Turkey relies on imports for more than 70% of its energy consumption, and its foreign exchange reserves suffered the largest single-month decline on record in March; the Indonesian rupiah has even fallen below its lowest level during the 1998 Asian financial crisis. As my colleague Daniel Moss wrote, Indonesia is highly vulnerable to the shockwaves of the Iran war.

Economists point out that the close link between energy and currencies is a key factor that distinguishes this crisis from previous ones. In the 1970s, the United States was still a net oil importer, and the oil crises of 1973 and 1979 pushed up U.S. import costs, leading to a depreciation of the U.S. dollar—which to some extent mitigated the impact on other countries that purchased crude oil in U.S. dollars.

This time, however, the situation is precisely the opposite: now that the United States has become a major global supplier of oil and natural gas, the U.S. dollar is likely to strengthen rather than weaken. For emerging Asian economies with meager domestic oil reserves, this means they not only have to pay higher prices for crude oil but also higher costs for the U.S. dollars needed to buy it.

Governments around the world have been slow to promote clean energy technologies such as wind, solar, nuclear energy, batteries, and electric vehicles. The current crisis should serve as a wake-up call: these technologies are not only necessary to avoid the long-term damage of climate change but also the best path to break free from dependence on fossil fuels. Dependence on fossil fuels leaves fragile economies and their currencies at the mercy of energy imports that are highly vulnerable to disruption and price volatility.

Take Indonesia as an example. The country is striving to maintain the legal requirement that the budget deficit does not exceed 3% of gross domestic product (GDP) by 2026, but currently about 2.7% of its GDP is spent on fossil fuel subsidies, most of which go to discounted sales of gasoline and diesel. The Thai government, meanwhile, expects its debt to increase as it borrows 150 billion baht (approximately 4.6 billion U.S. dollars) to cover the deficit of the oil fuel fund. Indian government-controlled oil retailers lose as much as 10 billion rupees (approximately 104 million U.S. dollars) per day due to selling gasoline, diesel, and liquefied petroleum gas below cost.

Notably, in these countries, electric vehicles are rapidly gaining popularity thanks to the rapid decline in costs. In February, more than 30% of the cars sold in Indonesia and Thailand were pure electric vehicles; even in India, where the development of electric vehicles is relatively slow, sales in April still increased by 41% compared with the same period last year, with electric tricycles accounting for 60% of the market share.

Chaotic government policies may not always promote this transition, but there is no doubt about consumers’ strong demand for alternative energy. For countries that subsidize fuel, like most in Asia, any additional fiscal space should be invested in areas such as eliminating import taxes on electric vehicles, supporting electric vehicle purchases, and scrapping old traditional fuel-powered cars. This investment accounts for only a small portion of the huge funds needed to reduce oil import costs in the long run, while the enormous benefits it brings in terms of human health and climate protection are free of charge.

The same is true for liquefied natural gas. As a costly and unreliable source of grid power, it is now being fully replaced by wind, solar energy, and batteries.

In the Middle East, some of the world’s richest economies have amassed enormous wealth by charging high prices for oil and natural gas exports to the world’s poorest people for decades. Clean technology will ultimately break this pattern, allowing people to access cheaper energy in the coming decades. If emerging countries can seize this opportunity, this may be the last time an energy crisis evolves into a currency crisis.

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