Asian governments are working out how to tackle a sharp rise in energy prices and growing concerns about energy security across the continent, in the process prompting a range of policy responses.

According to a note from Capital Economics, some administrations are considering inflation-suppressing measures such as subsidies or price caps, though history has shown these tend to provide limited incentives for overall energy conservation and can, in the end prove fiscally costly. From a purely fiscal point of view, it also means that countries with weaker public finances may have little choice but to allow prices to rise sharply. While such an approach would push up inflation and weigh on economic growth in the short-term, this approach is considered more sustainable over time.

Although energy prices have retreated over the past 48 hours, Brent crude remains more than 40% higher than at the start of the year. As a result, despite the recent pullback on some fronts, economies across Asia continue to face significantly higher import costs than before the conflict in Iran.

As such, the policy debate can broadly be framed around who ultimately bears the burden of more expensive imported fuel: governments through subsidies, energy companies through administrative price controls, or end consumers through the full pass-through of higher prices on the part of the buyer. Alongside these measures, some countries in the region are now introducing policies aimed at reducing demand or expanding supply.

One option has been for governments to absorb the cost directly through subsidies. Indonesia has reaffirmed support for its fuel subsidy programme in an effort to help shield domestic consumers from rising energy prices, thereby limiting inflation. While such measures can provide short-term relief, they are ultimately expensive for the public finances. The issue in Indonesia is particularly sensitive given growing concerns over the country’s fiscal position and a broader shift towards economic populism seen in recent months. To keep its budget deficit within the legal limit of 3.0% of GDP, the government would need either to cut spending elsewhere or raise taxes – both of which are politically difficult choices. Another possibility would be to relax fiscal rules temporarily, as was permitted during the pandemic six years ago, though this could further undermine longer-term confidence in the country’s fiscal framework.

Japan is another country weighing subsidy measures designed to cushion households and businesses from higher energy costs. Such policies would only widen the fiscal deficit and could in the end add to concerns about the sustainability of Japan’s public finances, though these concerns are widely viewed as overstated.

A second approach involves capping prices and requiring companies to absorb higher costs rather than pass them on.

South Korea and Taiwan have both proposed limits on fuel prices, CAPECON notes. In practice, the burden of such measures tends to fall on companies involved in importing, refining or distributing fuel. In Taiwan, much of the current cost increase is thus absorbed by the state-owned CPC Corporation, while in South Korea it is more likely to be borne by the nation’s privately owned refiners.

Compared with large subsidy programmes, these policies can limit the direct fiscal burden on governments, although the overall impact depends on whether affected companies are state-owned or require compensation.

At the other end of the spectrum, some governments are passing higher costs directly on to consumers. Pakistan is one such example with Islamabad facing weak fiscal and external positions, and raising petrol prices by 20% as a result.

Sri Lanka too, which shares similar vulnerabilities, has imposed its own 8% increase. This approach limits fiscal costs and encourages more efficient energy use, but the immediate consequences include higher inflation, slower growth and a greater risk of social unrest. For countries with fragile public finances, in Southern Asia in particular, however, allowing prices to rise may be the only viable option.

Beyond deciding who bears the cost, some governments are seeking to curb energy demand directly. The Philippines has already introduced a four-day working week for government employees, Bangladesh has moved to ration petrol, and Vietnam has encouraged working from home but not enforced it yet.

Such measures can quickly reduce energy consumption, which is particularly important for economies running current account deficits or facing potential supply shortages. However, rationing through administrative controls rather than price signals often leads to inefficient allocation of energy and can disrupt economic activity in the long run.

Governments across Asia are also exploring ways to boost supply. One mechanism is the release of strategic petroleum reserves, a step reportedly under consideration in Japan as part of a potential wider global move. Drawing down reserves injects additional oil into the market, helping to cushion near-term supply shortfalls and ease price spikes.

In economic terms, this shifts part of the burden onto governments by reducing publicly held buffers but reserve capacity varies widely across Asia.

Japan, South Korea and China maintain large crude stockpiles, while India has expanded storage capacity in recent years. By contrast, much of Southeast Asia holds relatively limited reserves, leaving several economies more exposed to supply disruptions and prolonged volatility.

Some governments are also seeking to increase supply by switching to alternative fuels. Both China and Japan have increased coal usage in an effort to reduce reliance on more expensive imported liquefied natural gas. This is also being considered in Taiwan, and while this substitution may alleviate short-term energy shortages and reduce import costs, it results in higher carbon emissions and risks undermining medium-term decarbonisation goals.

Over the longer term therefore, the crisis in the Middle East has highlighted Asia’s heavy dependence on energy imports from the region, particularly crude oil and liquefied natural gas shipped through the Strait of Hormuz. One likely policy response is a renewed effort to diversify supply away from the Middle East as Japan has in recent years.

This could involve sourcing more fuel from producers such as the US, Australia and Africa, alongside greater investment in domestic production where possible, renewable energy, siting strategic reserves and gas storage. Such measures would prove costly at first but in time would strengthen energy security and reduce exposure to future geopolitical shocks.