Cheap oil is over – A hard budget era for Bangladesh

"The era of cheap oil is over. The world should forget about cheap oil," the late Venezuelan President Hugo Chávez said in 2005 during a visit to New Delhi.

At the time, Venezuela was the world's fifth largest oil exporter and an influential OPEC member. Chávez had accused Washington of attempting to destabilise his government and warned that his country would cut oil supplies to the US and export to China and India. Two decades later, his apprehension came true. From Democratic Bill Clinton to Republican Donald Trump, US policies toward Venezuela has not changed. Chavez's close aide and successor Nicolas Maduro is now imprisoned in New York and his country Venezuela has lost control of its own oil resources.

Crude oil price had hit a record high of $145 a barrel in 2008. Apart from supply cut in Iraq, Venezuela, Mexico and some others, factors included concerns over possible Israeli attack on Iran and subsequent closure of Hormuz. Those concerns are now a reality.

Iran is devastated, Gulf states scaled down fuel outputs amid Iran's retaliations, and the Strait of Hormuz, which channels a fifth of global fuel and gas supplies, has almost been closed for a month since the US-Israel joint attack began on 28 February.

Today, the global oil shocks are far deeper than routine price volatility. The International Energy Agency has warned that the shocks from the ongoing Middle East war could even be worse than the crises from the 1970s and Russia-Ukraine war combined.

Even if fighting stops tomorrow, trade flows may take months to normalise, with higher fuel prices, shipping congestion and higher insurance premiums making sea trade costlier for months.

For Europe, which has been adjusting to reduced Russian energy supplies since the Ukraine war, the Gulf disruption compounds vulnerability. For Asia — especially energy-importing countries — the impact is immediate.

For Bangladesh, it is not just ensuring flow of fuel oil and gas, it is also about securing fertiliser supplies before the next crop season sets in. It is a tough test for the new government to balance the next budget book.

This is not Bangladesh's first energy shock. The spike following Russia's invasion of Ukraine in 2022 strained reserves, weakened the currency and forced recourse to the IMF. The pattern is well established. When fuel costs rise, import-dependent economies face a double bind: external balances deteriorate just as domestic inflation accelerates. With reserves still modest and reforms incomplete, Bangladesh enters this episode with limited buffers.

The forthcoming 2026-27 budget will be the BNP-led government's defining display of economic leadership in Bangladesh. With each decision – from subsidies to development spending priorities – will carry immediate political and economic consequences, the central question looms: how will the government navigate a hard budget era while safeguarding growth, social stability, and public confidence in a time when oil bites hard?

Global order turning more volatile

With Hormuz closed and major Gulf states cutting output, Brent crude futures soared about 55% in March to $112.78 per barrel, a record monthly jump since the 1990 Gulf War. A Reuters survey of economists and analysts conducted in March predicts Brent crude will average $82.85 per barrel ‌in 2026, about 30% higher than February's forecast of $63.85.

Some analysts say oil could test its 2008 record of $147 a barrel, even move towards $190 in a risk scenario if the Strait of Hormuz remains closed for an extended period, according to the survey. Analysts, however, largely expect supply ​to gradually recover in April and May, although prices are set to remain elevated even after.

Meanwhile, the world has started to accept the volatility as the new norm and is learning to cope with it. Global central banks and investors now believe that the world will never be the same because the current political and economic events are highly likely to rebuild the modern monetary system, forecasts the World Economic Journal, a publication of World Organisation for Development.

"The USD will stop being the world's reserve currency, which would be damaging for the indebted American economy that will find it hard to sell its Treasuries abroad and will likely face high inflation," it says in its March-April issue, noting that the Fed supports the US economy by printing cheap money.

Some BRICS countries are moving away from the US dollar and trying to ensure their monetary sovereignty, while developing countries are also increasingly using their own currencies in trades between them instead of US dollar, says the Journal's latest issue, titled 'the world economy is under pressure: New American politics and global market."

 "…the world is getting fragmented overall. All this leads to certain market volatility," says an article in this issue, stating "volatility has long become the new norm and most markets have started getting used to it."

Hard budget constraint for Bangladesh

Amid such volatility in global financial markets, Bangladesh is preparing for its next budget, which will be the first of the new government that inherited a fragile economy from the previous regime.

Economist Debapriya Bhattacharya has said Bangladesh's new government is preparing its first national budget amid structural weaknesses, incomplete reforms and growing economic pressure, with limited fiscal space emerging as a major challenge.

The government is operating under a "hard budget constraint" and this situation requires strict fiscal discipline and careful prioritisation of expenditure, said Debapriya on Tuesday.

An extended oil shock makes that constraint harder as higher import bills for oil and gas will widen the current account deficit. Any pass-through will raise the cost of production and transportation, fueling inflation further. If subsidy costs balloon to keep domestic fuel prices unchanged, it will deepen fiscal strain.

Both paths carry economic and political risks for the new government, grappling to meet its election pledges with limited revenue and higher borrowing. As local fertilizer factories have been shut for want of gas, Bangladesh needs urea fertiliser mostly from the Middle East. If the war prolongs, fertiliser will be costlier and supplies uncertain, putting food security at stake and causing rice price hike--- a politically sensitive issue for any government.

That means the coming budget will not merely be an accounting exercise for Bangladesh. It will be a test of fiscal discipline, subsidy reform, energy diversification and crisis management — all under a hard budget constraint-- a tight fiscal condition where spending must align strictly with available resources because borrowing and monetary expansion options are limited.

Even if war ends tomorrow and Hormuz reopens, insurance costs, shipping disruptions and risk premiums will keep energy expensive and supplies delayed. Whether oil will stay cheap is no longer a question. Like the rest of the world, Bangladesh will need to adapt quickly to the new norm—global financial market volatility.