When the United States and Israel launched military strikes against Iran in early 2026, the immediate casualties were measured in geopolitical terms — shattered diplomacy, rattled alliances, and a Middle East teetering on the edge of wider conflict. But thousands of miles away, in the narrow streets of Kathmandu, the casualties were far more ordinary: a homemaker scouring her neighbourhood for an LPG cylinder, a pustakari maker in Bhaktapur unable to cook his sweets, a taxi driver watching his margins evaporate with every government price notification. Nepal’s petroleum crisis is not merely a story of global oil markets. It is the story of a structural vulnerability decades in the making — and a crisis that has finally made it impossible to look away.

The Trigger: West Asia in Flames

The escalating conflict in the Middle East sent Brent crude prices surging to around $115 per barrel — up nearly 50 percent since the start of hostilities — with projections of $150 per barrel should the conflict persist. After oil tanker traffic through the Strait of Hormuz came to a halt, benchmark prices spiked as high as $82 per barrel in the initial days of the crisis before climbing further. The Strait of Hormuz, through which nearly 20 percent of the world’s oil passes daily, became the pivot around which the fate of import-dependent economies like Nepal turned.

Nepal, however, does not import crude oil directly. It imports only finished petroleum products — petrol, diesel, and LPG — through a single channel: the Indian Oil Corporation (IOC). This arrangement makes Nepal doubly exposed. India itself imports approximately 85 percent of its crude oil requirements, with around 35 percent sourced from Russia and the remainder from Gulf nations. Any disruption in India’s supply chain flows directly and immediately into Nepal’s fuel supply. The Nepal Oil Corporation (NOC), the state-owned monopoly responsible for fuel distribution, has no independent sourcing relationship with any international supplier. It is, in the most literal sense, entirely dependent on its neighbour.

The Numbers: A Crisis Written in Rupees and Litres

The scale of Nepal’s petroleum dependence is staggering when laid out in data. According to the Department of Customs, in the first seven months of fiscal year 2025/26 alone, Nepal spent Rs 139.10 billion on imports of petrol, diesel, and LPG — Rs 69.91 billion on diesel, Rs 38.13 billion on petrol, and Rs 31.85 billion on LPG. Petroleum products account for 17 percent of Nepal’s total import bill, making them the single largest import category. In the same period, Nepal’s total trade deficit widened to over Rs 955 billion, with total imports reaching Rs 1.289 trillion against exports of just Rs 191.11 billion.

On the domestic front, the NOC raised the price of petrol by Rs 30 per litre and diesel by Rs 25 per litre within a single ten-day period — petrol reaching Rs 187 per litre and diesel Rs 167 per litre in Kathmandu. Yet even these increases failed to reflect the true international cost. Based on the latest IOC price lists, the NOC has been selling petrol at a loss of Rs 47.12 per litre, diesel at a loss of Rs 133.45 per litre, and LPG at a loss of Rs 416.37 per cylinder. The corporation’s cumulative losses have reached Rs 18.81 billion, and with its reserves nearly exhausted, officials warned that meeting the payment due to the IOC on April 8 — monthly payments of up to Rs 24 billion — would be extremely difficult. The Price Stabilisation Fund, which holds approximately Rs 19 billion, was being considered as an emergency buffer. Discussions were also underway about bank loans and requesting deferred payments from the IOC.

Nepal’s daily consumption stands at approximately 2 to 2.5 million litres of petrol, 4 to 4.5 million litres of diesel, and around 45,000 metric tonnes per month of LPG. A scarcity in any of these — or a sustained price shock — has simultaneous and cascading effects on inflation, transportation, agriculture, and household welfare.

The Ripple Effects: When Fuel Costs Rise, Everything Does

The economic consequences of a petroleum shock do not stay contained to petrol stations. They travel through every sector of an import-based economy.

Inflation. Economist Dr. Gunakar Bhatta has warned that the crisis is increasing supply-side pressures, raising the cost of both imported and domestically produced goods. Citing IMF research, Dr. Bhatta noted that a 10 percent increase in crude oil prices pushes inflation up by 0.4 percentage points and reduces economic growth by 0.15 percentage points. The Ministry of Finance has already revised its GDP growth estimate for the current fiscal year down to 3.5 percent — a figure that becomes harder to defend with every upward revision in fuel prices. Inflation had been running at just 2.4 percent year-on-year as of January 2026, one of the lowest readings in years. The fuel shock threatens to unwind this hard-won stability.

Agriculture. Fuel is not only a transport cost — it is an agricultural input. Rising diesel prices increase the cost of irrigation pumps, tractors, and the transportation of fertilisers. At the same time, disruptions in Middle Eastern supply chains have begun to affect the availability of chemical fertilisers, which are petroleum-derived. A squeeze on agricultural inputs, combined with rising transportation costs, risks pushing food prices higher precisely when low-income households can least afford it.

Remittances. This is perhaps the most underappreciated risk. Nepal receives approximately 41 percent of its total remittance inflows from Gulf countries — a lifeline that accounts for around 25 percent of GDP, according to IMF data. Millions of Nepali workers are employed across the UAE, Qatar, Kuwait, Saudi Arabia, and Oman. A prolonged conflict in West Asia threatens both their employment and their ability to remit earnings home. The IMF’s February 2026 assessment had projected Nepal’s economic recovery to continue at a moderate pace, noting that “buoyant remittances” and “resilient tourism” were supporting the external position. A disruption to Gulf remittances would strike at the very foundation of that projection.

Tourism. The United States is Nepal’s third-largest source of tourists, with 7,515 Americans arriving in February 2026alone. Most international flights to Nepal transit through UAE and Qatari airports — hubs now disrupted by regional conflict. Rising fuel prices also directly increase airfares, deterring travellers. The World Bank had already flagged tourism underperformance in its November 2025 Nepal Development Update, noting disruptions caused by upgrades at Tribhuvan International Airport and geopolitical tensions affecting Middle Eastern transit routes. The fuel crisis compounds these pressures further.

Revenue. The government had aimed to collect Rs 910.20 billion in revenue by mid-March 2026. It collected only roughly half of its annual target of Rs 1.419 trillion through the first eight months of the fiscal year. Rising fuel prices reduce disposable incomes, dampen consumer spending, slow imports, and therefore reduce customs-based revenue — creating a fiscal squeeze precisely when the state may need resources to provide relief.

The Structural Problem: A Vulnerability by Design

It would be a mistake to treat this crisis as simply bad luck. Nepal’s petroleum vulnerability is architectural — built into the country’s economic structure over decades of policy inaction.

Nepal imports 100 percent of its fossil fuel requirements. It has no domestic oil production, no refining capacity, and until recently, no meaningful strategic petroleum reserve. The government has discussed building storage infrastructure capable of holding three months of petroleum supply for years, but land acquisition disputes and bureaucratic delays have repeatedly stalled the project. Currently, the NOC’s fuel stock can meet domestic demand for only 10 to 12 days.

The country’s exclusive dependence on the IOC as its sole fuel supplier — a legacy of geography, political relationships, and institutional inertia — means that Nepal has no price negotiation leverage, no alternative supply routes, and no buffer when India itself faces supply pressures. In 2015, when India imposed a trade blockade, Nepal’s economy was brought to its knees. Fuel queues stretched for days. Hospitals rationed supplies. The experience is still fresh in Nepali memory, and it is that memory — as much as the current shortage — that has driven consumer panic in recent weeks.

Former Vice Chairman of the National Planning Commission, Min Bahadur Shrestha, has warned that if the West Asian crisis continues for a prolonged period, Nepal’s economy could face a major crisis. “The increase in fuel prices raises inflation,” he said. “To avoid such a crisis, the government must prepare effectively immediately.”

A Silver Lining? The Electric Transition

One development offers genuine grounds for cautious optimism. Nepal’s electric vehicle and induction cooking revolution — accelerated by the trauma of the 2015 blockade — appears to be providing a partial cushion against this shock. Electric cooking stove imports rose from 111,600 units in the same period of the previous fiscal year to 132,000 units this year, according to Department of Customs data. In Kathmandu, the proportion of households using induction stoves as either primary or backup cooking devices has grown substantially, which is why LPG queues — while still visible — have been less catastrophic than in 2015.

Nepal’s hydropower generation capacity currently stands at around 3,000 MW, and IMF projections suggest it could double within four years and triple in the medium term. If the country accelerates its push into both hydropower electricity exports and domestic electrification — replacing petroleum consumption with domestically generated renewable energy — it could permanently reduce its exposure to global oil shocks. The government has also passed an “Order to Blend Ethanol in Petrol” which, once gazetted, could cut the annual fuel import bill by approximately Rs 6 billion annually, according to the Minister for Industry, Commerce and Supplies.

These are meaningful steps. But they remain partial solutions to a structural problem that demands comprehensive policy action.

What Must Be Done

The immediate response has been inadequate. While countries like Bangladesh introduced fuel rationing and remote work policies, and Vietnam scrapped duties on petroleum imports to stabilise domestic prices, Nepal has not implemented any comparable emergency measures. The NOC has continued to absorb losses rather than pass costs on fully to consumers — a politically understandable decision, but one that simply transfers the crisis from households to the state balance sheet.

A more credible response would include several elements. First, the government must accelerate the long-delayed strategic petroleum reserve project. A nation that imports 100 percent of its fuel and holds only 10 to 12 days of stock is not running an energy policy — it is running a gamble. Second, Nepal must begin serious diplomatic and commercial exploration of petroleum supply diversification, reducing its monopsonic dependence on the IOC. Third, investment in the electrification of transport and cooking must be treated as a national security priority, not merely an environmental aspiration. And fourth, targeted cash transfers or fuel subsidies for low-income households — those hit hardest by price increases — must be implemented without delay.

Conclusion: The Crisis We Were Always Waiting For

Nepal’s petroleum crisis of 2026 did not begin in Tehran or Tel Aviv. It began decades ago, in planning offices that delayed storage projects, in policy frameworks that entrenched single-supplier dependence, and in budget cycles that consistently underfunded energy infrastructure. The West Asian conflict merely lit the fuse on a vulnerability that was always there.

For a country with some of the world’s most extraordinary hydropower potential — rivers descending from the Himalayas with an estimated 83,000 MW of technically feasible capacity — there is something both tragic and avoidable about being held hostage to global oil markets. Nepal does not lack the resources to build energy sovereignty. It has, thus far, lacked the urgency.

Perhaps this crisis will provide.

Sources: The Kathmandu Post, Rising Nepal Daily, Nepal News, Spotlight Nepal, Clickmandu, World Bank Nepal Development Update (November 2025), IMF Article IV Consultation (February 2026), IMF Sixth ECF Review (October 2025), Department of Customs Nepal, Nepal Oil Corporation.