Tensions have intensified in the ongoing conflict between the United States and Iran. Military exchanges have extended, drawing additional countries into the fracas, with strikes and counterstrikes affecting areas connected to energy infrastructure and major transport hubs.

The escalation has already disrupted parts of the global oil and gas supply chain, damaging infrastructure, reducing production in some areas, and creating profound uncertainty around global energy flows. Ship traffic through the Strait of Hormuz, one of the world’s most critical energy transit routes, has slowed significantly as security concerns rise.

According to the US Energy Information Administration, roughly 20 million barrels of oil per day, about one-fifth of global petroleum consumption, passes through this corridor, as such, any disruption immediately reshapes expectations about global supply and prices.

Consequently, oil prices have increased as markets reprice in the risk of supply disruption. International financial markets are sensitive, and stock markets across parts of Asia and the Middle East have fallen considering increased uncertainty. The longer the war continues and the more countries become involved, the greater the global impact and the more pervasive the stock market tremor will be. Historical evidence shows that while energy prices spike quickly during geopolitical crises, the broader economic and financial adjustment unfolds over a longer period. This heightened uncertainty forces investors to become more cautious as they reassess global risk.

The global pattern has direct implications for small, open, energy-importing economies like Jamaica and much of the Caribbean through the transmission mechanism. Jamaica does not produce oil at scale; we import petroleum products. An increase in oil prices means an increase in the import bill, which puts pressure on the current account and strains foreign exchange markets and the Net International Reserves. Energy is a foundational input. A rise in fuel costs increases electricity costs, and production, transportation, and distribution expenses rise across the economy. Even with disciplined monetary management by the Bank of Jamaica, the first-round effect is higher imported cost-push inflation.

Businesses facing higher energy bills will pass those costs on to consumers, which reduces household purchasing power. Lower-income households, who spend a far larger share of their income on energy and basic goods, will feel the brunt of the burden. Wages lose real value, further eroding competitiveness in economies like Jamaica where labour productivity and total factor productivity are low.

Oil price shocks also have implications for fiscal policy. Governments across the Caribbean operate within constrained frameworks shaped by past debt crises and IMF structural adjustment programs. An increase in oil prices can have two opposing effects. On one hand, governments may collect more taxes linked to Special Consumption Taxes (SCT) and other ad valorem fuel duties. On the other hand, higher fuel prices raise the cost of living, felt most acutely by the poorest and most vulnerable who are least able to absorb the shock. Governments therefore face political and social pressure to cushion the effects through subsidies, tax adjustments, or targeted transfers.

In Jamaica’s case, years of fiscal reform and debt reduction have stabilised its macroeconomic metrics. Yet stability alone does not translate into resilience or immunity from external shocks. A sustained oil shock will complicate fiscal planning and make matters worse if Jamaica were to be hit by another hurricane for the third consecutive year. This would place greater demands on the budget if rising energy costs coincide with reconstruction spending. What appears as a geopolitical conflict thousands of miles away ultimately becomes a line item in the national budget and a source of hardship for the most vulnerable households.

For tourism-dependent economies, such as Jamaica and the rest of the Caribbean, the story extends further. The island structure of the region means that it relies heavily on airlift. Higher jet fuel costs increase airline operating expenses, translating into higher ticket prices, reduced flight frequencies, or lower margins for carriers. In a competitive global tourism market, profits are made on the margin. A persistent oil shock, therefore, carries potential second-round effects on visitor arrivals, employment, and foreign exchange earnings.

Financial markets add another layer. When global investors shift into low-risk mode during geopolitical crises, capital flows towards safe-haven assets. Emerging and frontier markets like Jamaica may experience capital outflows or tighter financing conditions. Sovereign spreads can widen. Global risk aversion can increase borrowing costs, independent of domestic policy performance.

What then should policy look like?

First, fuel price risk management must become more systematic. Hedging strategies carefully designed and transparently governed can reduce exposure to short-term volatility. Some countries have used derivatives to lock in portions of their fuel import bill at predetermined prices. Hedging is not speculation; it is insurance against extreme shocks.

Second, diversification of the energy mix is no longer optional. The Caribbean possesses significant renewable potential: solar irradiation among the highest globally, wind corridors, geothermal resources in parts of the Eastern Caribbean, and emerging battery storage technologies. Reducing dependence on imported fossil fuels directly improves the balance of payments, enhances energy security, and moderates inflation pass-through. Look at China, they have diversified extensively, oil represents 10 per cent of their energy mix. Every megawatt generated from domestic renewables is a hedge against geopolitical instability.

Jamaica has made progress in integrating renewables into its generation mix, but deeper transformation is possible. Grid modernisation, storage investment, and regulatory reforms that incentivise distributed generation can accelerate the shift. Energy resilience is macroeconomic resilience.

Third, regional cooperation must move from rhetoric to architecture. Caricom states share similar vulnerabilities: energy import dependence, tourism exposure, and narrow production bases. Coordinated fuel procurement mechanisms, shared strategic reserves, or even regional hedging facilities could create scale economies and reduce transaction costs. No matter how we look at it we must come together as region. Collective negotiation is stronger than individual fragmented approaches.

Jamaica and the Caribbean cannot control global conflicts. But we can control our preparedness. That means strengthening fiscal buffers, modernising energy systems, deepening regional integration, and embedding risk management into macroeconomic policy.

Andre Haughton is professor of economics at the University of the West Indies (UWI), Mona, specialising in international finance, global political economy, and the structural challenges facing developing and small states. He is the author of Overcoming Productivity Challenges in Small Countries: Lessons from Jamaica and Developing Sustainable Balance of Payments in Small Countries: Lessons from Jamaica. He has been recognised as UWI’s Most Outstanding Researcher (2017), received the award for Most Outstanding Research Project (2023), was named UWI Alumnus of the Decade (1999–2009), and is an IMF Distinguished Academic Fellow. Beyond academia, he is engaged in entrepreneurship, youth development initiatives, and strategic economic thinking aimed at advancing Jamaica’s development trajectory.

Andre Haughton.