Middle East conflict and new global economic reset
The world economy is no longer passing through a temporary crisis; it is undergoing a structural reset. The Ukraine-Russia war first disrupted the global energy order, and the escalating Middle East conflict has now deepened that rupture. Energy markets have become strategic weapons, supply chains are being reshaped, and global trade is increasingly dictated by geopolitics rather than economics.
The first major shock came after Russia's war with Ukraine that began on February 24, 2022. Europe's decades-long dependence on Russian gas collapsed rapidly as sanctions intensified and the Nord Stream pipelines were sabotaged. Before the war, Russia supplied more than 40% of Europe's natural gas. By 2026, the United States had emerged as Europe's top LNG supplier, while Russia's share of European gas imports fell sharply. Now, it is the third largest supplier with 15% of share.
This was not merely a commercial shift. It marked the end of an energy arrangement that had shaped European industry and global gas pricing for decades. Europe's strategic pivot away from Moscow weakened Russia's geopolitical influence, but it also came at a very high cost.
Europe swapped cheap energy for costly security
Replacing cheap Russian pipeline gas with imported LNG significantly increased Europe's energy bill. Security of supply was achieved, but industrial competitiveness suffered. Manufacturing costs rose, inflation accelerated, and households faced soaring utility expenses. Europe effectively exchanged one dependency for another; this time on expensive LNG imports.
Russia, meanwhile, attempted to redirect exports towards Asia, particularly China and India. But unlike oil, gas infrastructure cannot be redirected quickly. Pipelines define long-term relationships and require years of investment. Moscow's eastern pivot may eventually reduce some losses, but the transition remains slow and costly. Just as markets were beginning to adjust to the European energy reset, the Middle East crisis triggered a second and potentially more dangerous shock. The Strait of Hormuz – through which nearly one-fifth of the world's oil and LNG flows – has become a strategic chokepoint. Attacks on regional energy infrastructure and growing instability in shipping routes have pushed oil prices sharply higher and increased freight and insurance costs globally.
The disruption of LNG facilities in Qatar and rising tensions across the Gulf have exposed the fragility of the global energy system. Shipping through the Red Sea has become increasingly risky, forcing vessels to take longer and more expensive routes around Africa. Supply chains that were already strained after the pandemic and the Ukraine war are now being re-priced once again.
Energy no longer a commodity; it's a strategic weapon
Countries across Asia – including China, India, Japan and South Korea – are scrambling to secure alternative supplies. Europe faces renewed competition for LNG cargoes, while the United States has strengthened its position as the world's key energy supplier, left behind Saudi Arabia in crude oil exports. Energy flows are now being reorganised along political and strategic lines rather than pure market efficiency.
The consequences extend far beyond oil and gas. Rising energy costs feed directly into transportation, manufacturing and food prices, reviving fears of stagflation similar to the 1970s oil crisis. The global economy is increasingly fragmenting into competing blocs: a US-led LNG system, a discounted Russian energy network focused on Asia, and a volatile Middle Eastern oil corridor vulnerable to conflict.
Globalisation giving way to fragmentation
This fragmentation undermines the foundations of globalisation. Efficiency is giving way to redundancy and strategic security. The result is a more expensive and politically divided global economy. Unlike previous economic shocks, this transition offers no quick recovery. LNG infrastructure damaged by conflict cannot be repaired overnight. Trust between nations, once broken, takes years to rebuild. Even if temporary ceasefires emerge, markets are likely to continue pricing in geopolitical risk, keeping energy costs elevated for the foreseeable future.
Pakistan stands directly on economic fault line
For Pakistan, the implications are severe. As a net energy importer with fragile foreign exchange reserves, which were only $15.867 billion as on May 8, 2026, Pakistan remains highly exposed to rising oil and LNG prices. Higher fuel costs increase the import bill, may weaken the rupee, accelerate inflation in double digits and place additional pressure on already strained households and industries.
Agriculture is particularly vulnerable. Expensive fertiliser and energy costs could reduce usage by farmers during key Kharif crops season, affecting yields of rice paddy, cotton, sugarcane, maize, millet, sorghum, soybean and peanut. Lower agricultural output would not only threaten food security but also damage export earnings of textiles, rice and maize. More imports of cotton bales mean a large trade deficit in FY2027.
Industrial production also faces mounting risks as energy becomes increasingly unaffordable. Slowing manufacturing, weaker purchasing power and rising transportation costs could further reduce economic growth and increase unemployment.
Yet this crisis also offers Pakistan an opportunity to rethink its long-term energy and economic strategy. The country urgently needs to reduce inefficiencies in the energy sector, diversify supply sources and accelerate investment in indigenous resources such as renewables – solar and wind power – and Thar coal. Pricing mechanisms must become more transparent and market-based while ensuring protection for vulnerable consumers.
Most importantly, Pakistan needs a coherent long-term policy framework rather than short-term firefighting. Without structural reform, every global energy shock will continue to destabilise the domestic economy as well as external sector.
Old economic order is over
The convergence of the Ukraine-Russia war and the Middle East conflict marks the end of the old global energy order. A new system is emerging in which energy security outweighs economic efficiency, geopolitics shapes trade flows, and costs remain structurally higher.
This is not a passing disruption. It is a prolonged and irreversible global economic reset. The real question is whether vulnerable economies such as Pakistan can adapt quickly enough to survive in a world where the rules of trade, energy and power are being fundamentally rewritten.
The writer is a former VP of KCCI, commodities expert & an independent economic analyst focusing on global trade, energy economics and geopolitical risk