Introduction
At first glance, the ongoing conflict between the U.S.-Israel and Iran appears distant from Brunei Darussalam. Geographically removed from the conflict and buffered by its rich hydrocarbon endowment, Brunei may not appear to be affected by the war. However, such a view appears to be misleading and obscures the scale of the potential impact on the tiny sultanate. In an era of increasingly globally interdependent economies, geopolitical disruptions in the Strait of Hormuz have geoeconomic impacts on global supply chains.
Despite Donald Trump’s announcement on 21 April to extend the ceasefire, oil prices remain over $100 per barrel. While Brunei remains a top oil and gas producer in the region, higher oil prices may not be as economically beneficial, especially for its economic development. Over the past few decades, Brunei’s crude oil production has been steadily declining, averaging between 80,000 and 100,000 barrels per day in 2025, significantly lower than the levels it reached during its peak. Part of the reason for this can be traced to the government’s long-term strategy to manage production in extending the lifespan of its reserves, even as it simultaneously contends with ageing oil wells and maintenance disruptions.
Geopolitics as a Constraint on Brunei’s Economic Development
The timing of the crisis comes at a particularly challenging juncture as Brunei’s fiscal position has been under strain over the past decade. As with other rentier states, Brunei faces constraints on diversifying its economy. In 2025, Brunei’s economy is still largely dependent on oil and gas, which accounts for 45 percent of its GDP. However, the sultanate is in a delicate position as it navigates external pressure amid rising domestic burdens.
Since the oil glut crisis in 2014, followed by the COVID-19 pandemic in 2020, Brunei has recorded persistent deficits in the range of 10 to 15 percent of the GDP, which is equivalent to BND 2-3 billion annually. High spending on subsidies, rising costs, and infrastructure has further diluted the gains from higher oil prices as the state continues to bear the burden of sustaining the welfare regime. During the 21st Legco session, the Ministry of Finance has highlighted that the annual subsidy cost for electricity, fuel, and rice has exceeded BND500 million.
The war on Iran has created a precarious balance for Brunei’s long-term development strategy. The Wawasan 2035, which seeks to build towards a diversified knowledge-based economy ultimately aims as a means to reduce and widen Brunei’s source of fiscal revenue. Despite significant efforts in diversifying its economy, progress remains at a nascent stage. To date, Brunei’s diversification efforts have remained largely concentrated on expanding the oil and gas sector. This has been largely offset by major projects concentrated on downstream hydrocarbons and petrochemical plants namely by Zhejiang Hengyi Industries, Brunei Methanol Company, Brunei Fertiliser Industries and most recently, Brunei Polygel.
Since its operation, Hengyi has steadily been contributing around 8 to 10 percent of Brunei’s GDP. As highlighted in the Brunei Economic Outlook 2025 by CSPS, the rapid growth of the petrochemical plant currently operates at around 175,000 barrels per day which has exceeded the domestic crude production that sits around 95,000 barrels per day. As a result, this structural imbalance has also been accompanied by a significant increase in feedstock imports. To date, around 70 percent of its feedstock relies on imported crude oil, including major producers in the Middle East such as Saudi Arabia and the UAE.
With the closure of the Strait of Hormuz and no clear resolution in sight, the conflict is proving to be a double-edged sword. On the one hand, the capacity of Brunei’s petrochemical plant to operate at full scale will be challenging as securing feedstocks is increasingly becoming more competitive under current market conditions. The physical damage to major facilities across the Middle East’s oil and gas producers means that Brunei, along with the rest of the world, must secure alternative suppliers to maintain an already fragmented global energy system.
On the other hand, like many other oil exporting countries, the surge in commodity prices will also improve its fiscal outlook.In recent reports, Hengyi Industries has reported that profits have increased 40-fold since the conflict began, with its petrochemical plant in Brunei benefiting. Petrochemical products that were previously oversupplied are now taking strategic importance within the global value chains.
Rising Import Costs and Inflationary Pressures in Brunei
While inflation in Brunei remains low for now, the war will inevitably affect households in the near future. As Brunei is heavily reliant on food imports, rising energy prices across the region will gradually raise the cost of groceries. With the cost of subsidies creeping up, the burden on government welfare programs will surely offset the gains from higher energy prices.
So far, Brunei has managed to strengthen its relations with key partners to ensure food security remains stable and avoid severe pressure. In April, His Majesty Sultan Hj Hassanal Bolkiah held significant high-level diplomatic talks with Indonesia, Malaysia and Singapore to safeguard vital supply chains, food resources and energy resilience, ensuring national stability from severe global economic pressures. At the same time, on 14 April, the Australian PM made his first visit to Brunei as part of a series of regional tours that underscored cooperation on energy and food resilience. Currently, Australia is Brunei’s largest exporting partner with Brunei’s fertilizer accounting for 11 percent of Australia’s fertilizer imports and 9 percent of diesel imports in 2025. Given Australia’s role as a key agricultural and meat source for the sultanate, such arrangements are important for both countries to ensure steady, open trade and maintain the supply chain.
Conclusion
In the short run, Brunei may seek to capitalise on higher oil prices to strengthen its fiscal position through its upstream and downstream sectors. No country will be immune as the region will be acutely vulnerable to food security challenges. Addressing this crisis requires coordinated efforts at the national, regional and multilateral levels. At the national level, Brunei will need to reprioritise spending while safeguarding food and energy security.
At the regional level, ASEAN’s existing mechanism remains limited in managing the systemic shock, which pushes the urgency for ASEAN-GCC cooperation to secure the stable flows of oil and fertilizers. Strengthening regional resilience through deeper coordination, diversified sourcing and effective partnership will be essential to maintain stability and sustain economic development.
