Analysis
Indonesia’s Gas Crisis Is Throttling Its Factories — and the Worst May Be Ahead
Indonesia’s manufacturers face a double blow: a Middle East energy shock closing the Strait of Hormuz and a deepening domestic gas crunch forcing factories to run well below target capacity.
The kilns at a ceramics plant on the outskirts of Surabaya have been running at barely two-thirds of their normal capacity for three weeks. The gas pressure gauge — usually a reassuring steady hum — has become an anxiety meter, swinging unpredictably as allocations from the state pipeline operator tighten and then thin out altogether on some days. Workers who normally operate three shifts have been sent home mid-rotation. “We cannot plan production,” says a senior executive at the company, who requested anonymity due to commercial sensitivities. “We are not running a factory anymore. We are running a rationing exercise.”
That factory floor, somewhere in East Java, is a microcosm of what is happening across Indonesia’s industrial heartland in March 2026. The country — Southeast Asia’s largest economy and, until recently, a respectable net gas producer — finds itself caught in a vice: squeezed from without by the most disruptive Middle East energy shock since the 1973 Arab oil embargo, and from within by a structural domestic gas supply crisis years in the making.
The Hormuz Shock: Asia’s Energy Nightmare Materialises
On February 28, 2026, following US-Israeli military strikes on Iran, the Strait of Hormuz — the narrow chokepoint through which roughly one-fifth of global oil and a third of liquefied natural gas transit every day — was effectively shut to commercial traffic. The consequences were immediate and seismic. Brent crude surged nearly 20 percent on Monday morning, breaching $111 per barrel for the first time since July 2022.
For Asia, the closure was catastrophic in a way that cannot be overstated. In 2024 alone, 84% of the oil and 83% of the LNG shipped through the Strait was bound for Asia. The Gulf states’ combined production dropped sharply as strikes hit critical infrastructure. Attacks on Saudi Arabia’s Ras Tanura refinery, Qatar’s Ras Laffan gas processing base, and the UAE’s Ruwais refinery complex, combined with Iran’s blockade, resulted in a drop of Gulf countries’ oil production by 10 million barrels per day compared to March 2025.
Governments and businesses across Southeast Asia scrambled to stave off energy shortages as the Strait of Hormuz remained shut, with government offices in the Philippines moving to a four-day work week and officials in Thailand and Vietnam encouraged to work from home.
Indonesia stood at a particularly precarious intersection. Unlike Japan, which maintains multi-month strategic reserves, or Malaysia, which is a net oil exporter, Indonesia’s exposure was both acute and structural. Twenty-five percent of Indonesia’s oil and gas is imported from the Middle East region, and disruptions to shipping activities in the Strait of Hormuz were predicted to last longer than initially expected.
A Domestic Crisis Hiding in Plain Sight
What makes Indonesia’s predicament uniquely dangerous — and uniquely instructive for regional energy planners — is that the Hormuz shock did not arrive in a vacuum. It landed on top of a pre-existing, chronic domestic gas supply deficit that analysts at Wood Mackenzie and the IEEFA had been warning about for years.
Indonesia’s population of over 250 million and fast-developing economy make it Southeast Asia’s largest gas market. The country has outlined ambitious production targets of 1 million b/d of oil and 12 bcfd of gas by 2030, in support of energy security. However, declining domestic gas supply remains a major concern.
The structural architecture of this crisis is worth dissecting. Indonesia produces, in theory, around twice as much gas as it consumes. Yet factories across Java remain chronically underserved. The paradox lies in decades of policy failure: export commitments locked up volumes in long-term LNG contracts with Japan and South Korea; infrastructure gaps left Java — where 60% of industrial demand is concentrated — physically disconnected from gas fields in Kalimantan and Sumatra; and the Domestic Market Obligation (DMO), set at 25% of production, proved woefully inadequate as industrial demand surged.
State gas distributor Perusahaan Gas Negara (PGN), which controls the bulk of Java’s pipeline network, has been unable to satisfy industrial demand for the better part of a decade. Chemical, ceramics, and textile industries are among the main users of natural gas in Indonesia, and the industrial sector is more exposed to gas supply-side shocks than other sectors.
Wood Mackenzie’s supply scenario suggests that demand and supply would be tightly balanced until 2026, with the ESDM forecasting a gas deficit by 2033 without the development of new fields. The Hormuz crisis has, in effect, compressed that timeline from years into weeks.
Industry on its Knees: The Factory-Floor Reality
The most visible industrial casualty so far is PT Chandra Asri Pacific, Indonesia’s largest integrated petrochemical complex and a critical upstream supplier to packaging, automotive, consumer goods, and construction material manufacturers nationwide. Chandra Asri declared force majeure on all contracts, citing the security situation around the Strait of Hormuz which has resulted in significant disruption to maritime transportation activities and materially disrupted the shipment and delivery of feedstock supplies.
The company is selectively adjusting its operational run rates in accordance with supply conditions and production needs, while diversifying sources of raw materials and maintaining prudent inventory management. In corporate-speak, that means production cuts.
The ripple effects extend far beyond Chandra Asri. A second industry executive — head of operations at a major Java-based ceramic tile manufacturer — was more blunt, speaking on condition of anonymity: “Our gas allocation from PGN has been cut by about 30 percent over the past three weeks. Our kilns need stable pressure to maintain firing temperatures. When pressure drops, you either slow production or you risk product defects and equipment damage. We have chosen to slow down. We are running at around 65 percent of target capacity right now.”
The ceramics sector is emblematic of a broader industrial unravelling. Ceramics production is among the most gas-intensive light manufacturing activities, requiring continuous high-temperature firing. Fertilizer plants face an equally dire calculus: they cannot throttle production gradually the way an assembly line can. Gas shortfalls below a threshold trigger complete shutdowns, as Bangladesh discovered in early March when production activities at two major fertilizer factories were temporarily suspended in compliance with government directives due to gas shortage and a decrease in gas pressure.
| Sector | Gas Dependency | Crisis Exposure | Key Risk |
|---|---|---|---|
| Petrochemicals | Very High | Critical (feedstock) | Supply chain cascade |
| Ceramics/Glass | Very High | High (kiln temps) | Quality, capacity loss |
| Fertilizers | Very High | Critical (process gas) | Potential shutdown |
| Textiles | Moderate–High | High | Output reduction |
| Steel/Metals | Moderate | Medium–High | Cost inflation |
| Palm-oil Processing | Moderate | Medium | Export competitiveness |
The Fiscal Arithmetic Is Brutal
For Jakarta, the energy shock arrives at the worst possible budgetary moment. Indonesia, a net oil importer consuming 1.6 million barrels per day but producing only 608,000, faces punishing fiscal arithmetic. The 2026 state budget assumed an Indonesian crude price of $70. Every single-dollar increase above that adds Rp 10.3 trillion in subsidy costs while returning only Rp 3.6 trillion in revenue. The budget is already underwater.
With Brent at $111 and climbing, the gap between budgeted and actual prices threatens to blow a hole of well over Rp 400 trillion in the fiscal accounts — a sum that dwarfs any credible subsidy reserve. Bank Indonesia has already revised its global growth forecast downward. The central bank cut its 2026 global growth projection to 3.1% on oil-driven inflation risks, while maintaining Indonesia’s GDP outlook at 4.9–5.7% — a gap that analysts privately acknowledge reflects official optimism more than analytical precision.
Currency pressure compounds the problem. Escalating Iran tensions risk pushing the rupiah toward Rp 20,000 per US dollar as oil prices surge and capital outflows intensify. A weaker rupiah raises the cost of every LNG cargo diverted from Middle Eastern to alternative suppliers, creating a vicious feedback loop between energy inflation and currency depreciation.
The Government’s Triage Response
Jakarta’s initial response has been textbook crisis management: reassurance, redirection, and storage pledges. Energy Minister Bahlil Lahadalia acknowledged that Indonesia currently lacks fuel storage with a capacity of more than a month, saying “the storage is insufficient,” and announced plans to construct additional fuel storage while redirecting gas and oil imports from the Middle East to alternative countries.
The reassurance that reserves remain within “safe” national thresholds has done little to calm manufacturers. Indonesia’s fuel reserves stood at roughly 23 days, above the national minimum standard of 20–23 days, reflecting storage capacity constraints rather than an actual shortage — a distinction that matters at the macro level but is cold comfort to a ceramics plant manager rationing kiln time.
On the upstream side, there is some medium-term cause for optimism. Eni took Final Investment Decisions for the Gendalo and Gandang and Geng North and Gehem deep-water gas fields off East Kalimantan, targeting plateau production of up to 2 billion standard cubic feet per day of gas and 90,000 barrels per day of condensate. These projects — leveraging the existing Jangkrik floating production unit and Bontang LNG plant — represent a genuine vote of confidence in Indonesia’s upstream potential. But they will not begin producing until 2028 at the earliest. They offer no relief to a factory running at 65% capacity today.
The 1998 Ghost: Political Stakes Are High
The Council on Foreign Relations’ analysis of the Iran war’s Asian energy impact carries a pointed historical reminder that Jakarta’s policymakers would be wise to absorb: Indonesia’s 1998 popular uprising — violent at times and ultimately resulting in the end of the Suharto regime — was partly sparked by a sharp rise in fuel prices amidst the Asian financial crisis.
President Prabowo Subianto’s government, still consolidating authority after the 2024 election, faces a delicate political economy. Subsidized fuel price increases — almost inevitable given the fiscal math — risk triggering the kind of street-level anger that destabilised prior administrations. The Idul Fitri holiday period, when fuel demand traditionally spikes 12% above baseline, further compresses the political window for painful adjustments.
Industry associations are increasingly vocal. Factory floors running at 60–70% capacity do not merely produce less output; they produce unemployment. Indonesia’s manufacturing sector employs over 18 million workers directly. Even a 10% generalised output reduction — conservative, given present trends — implies millions of person-weeks of lost income rippling through supply chains from raw materials to logistics.
A Structural Reckoning — and a Strategic Opportunity
It would be analytically lazy to frame this purely as an exogenous shock. The Hormuz crisis has exposed, with painful clarity, structural vulnerabilities that Indonesia’s energy policymakers have deferred confronting for two decades: inadequate storage, export commitments that cannibalize domestic supply, infrastructure gaps between gas-producing and gas-consuming regions, and chronic underinvestment in both upstream exploration and demand-side efficiency.
Indonesia’s energy transition has been at a pivotal stage for several years. Progress in 2026 will depend on improving the bankability of renewable energy procurement, advancing grid access reform, and aligning power system planning with industrial demand for clean electricity. The current crisis makes the case — compellingly, if brutally — for accelerating that transition. Every ceramics plant that today cannot fire its kilns for lack of gas could, in principle, be drawing from geothermal or solar-backed process heat within a decade, reducing exposure to both foreign supply shocks and domestic pipeline politics.
The Wood Mackenzie assessment of Indonesia’s undeveloped gas resources — over 35 trillion cubic feet in undeveloped resources from discoveries such as Abadi, Tangkulo, Layaran, Geng North, and Timpan — underscores that the country is not resource-poor. It is policy-poor and infrastructure-poor. Monetising those reserves at speed requires regulatory certainty, contract sanctity, and a pricing regime that makes upstream investment competitive with alternative destinations for global capital.
For international investors watching from London or Singapore, the near-term signal is clear: Indonesia’s energy vulnerability creates both risk and opportunity. The risk is a manufacturing sector contracting faster than official GDP projections assume, currency instability, and the political volatility that energy inflation historically generates in emerging markets. The opportunity lies in the renewables and LNG infrastructure gap — from Sumatra floating storage to Java geothermal expansion — that this crisis has made politically unsustainable to delay.
What Jakarta Must Do — Now and Next
The immediate priority is industrial gas triage: the government needs a transparent, sector-by-sector allocation protocol that prioritises fertilizer plants (whose shutdown has food security consequences) and export-oriented manufacturers (whose contraction damages the current account) over less critical industrial uses. Ad hoc rationing by PGN is already creating arbitrary competitive distortions.
Medium-term, the single most impactful policy intervention would be accelerating LNG regasification capacity on Java — allowing spot LNG cargoes from Australia, the US Gulf Coast, and West Africa to substitute for constrained pipeline supply. Indonesia has the technical expertise; what has been missing is the political urgency. The Hormuz shock has now supplied that.
Longer-term, the crisis should catalyse what years of energy policy debate have failed to deliver: a credible, funded plan to develop the 35+ tcf of undeveloped domestic gas resources, combined with a renewables buildout that reduces industrial gas dependency. Indonesia’s geothermal endowment alone — the world’s largest — could supply substantial industrial process heat if policy barriers to development were removed.
The factory manager in Surabaya is not waiting for grand strategy. He is watching his gas pressure gauge and calculating whether to send more workers home. Jakarta’s job is to ensure that calculation resolves in favour of production — and that the structural vulnerabilities that made it necessary never recur.
Key Data Snapshot
- Strait of Hormuz closure: February 28, 2026 — ongoing
- Brent crude peak: $111/barrel (first since July 2022)
- Indonesia fuel reserves: ~23 days (national minimum: 20–23 days)
- Middle East share of Indonesia’s energy imports: ~25%
- Chandra Asri force majeure: Declared March 2, 2026
- Indonesia’s daily oil consumption: ~1.6 million bpd | Production: ~608,000 bpd
- Fiscal cost per $1 oil price increase above budget: +Rp 10.3 trillion subsidy burden
- Undeveloped Indonesian gas resources: 35+ tcf (Wood Mackenzie estimate)
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Analysis
How Malaysia “Shrugged Off” Trump’s Tariffs — and What Comes Next
When the Trump administration’s tariff regime rattled export-dependent Asian economies in 2025, Malaysia’s finance ministry response stood out for its composure. “We didn’t panic,” the finance minister told reporters, describing a deliberate strategy of diversification and negotiation rather than reactive concessions (Fortune).
From crisis response to execution agenda
That composure has carried into 2026. Malaysia’s economy minister has described this year explicitly as one of “execution,” as the Anwar Ibrahim administration works to lock in the policy gains built through 2025’s trade turbulence (Fortune). The framing matters: it signals Putrajaya sees 2026 less as a year of new initiatives and more as a year of delivering on commitments already made — the Johor-Singapore Special Economic Zone chief among them.
The semiconductor exposure that both helps and constrains
Malaysia’s electrical and electronics sector accounts for roughly 40% of total exports, with semiconductors alone comprising about 65% of E&E exports (J.P. Morgan Private Bank). That concentration is precisely why Malaysia benefited from 2025’s tariff exemptions on semiconductors, electronics and pharmaceuticals, and precisely why any future change to those exemptions carries outsized risk for Malaysian growth relative to more diversified regional peers (J.P. Morgan Private Bank).
The Johor-Singapore SEZ as the structural bet
Johor’s 7,300-acre innovation sandbox, part of the new special economic zone with Singapore, is Malaysia’s clearest attempt to convert its manufacturing base into a higher-value regional hub rather than remain a low-cost assembly point (Fortune). The zone’s stated ambition — combining Johor’s “land and scale” with Singapore’s “capital and speed” — positions the region to capture AI-linked infrastructure and hardware investment that would otherwise bypass both countries individually (Fortune).
Corporate consolidation follows the growth signal
Confidence in Malaysia’s execution story is visible in corporate activity too: two Southeast Asia 500 companies are reportedly exploring a merger that would form Malaysia’s largest construction conglomerate, a scale bet that typically follows — rather than precedes — genuine confidence in a multi-year infrastructure pipeline (Fortune).
The regulatory friction points
Not every 2026 storyline is frictionless. Malaysia has moved to temporarily block the Grok AI platform alongside Indonesia following a sexual-deepfake scandal, illustrating that Malaysia’s AI-forward economic strategy is running in parallel with an increasingly assertive AI-governance posture — a tension regional investors should track as a signal of how Malaysia intends to regulate the same technology sector it is courting for investment (Fortune).
What “execution” needs to mean by year-end
For Malaysia’s 2026 narrative to hold, three things need to materialise beyond announcements: measurable Johor SEZ tenant commitments, continued semiconductor export resilience against any tariff-exemption rollback, and a construction-sector consolidation that actually delivers infrastructure rather than simply consolidating market share.
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AI
Singapore’s AI Boom Is Now a Two-Country Story
Singapore has spent the past two years becoming one of the primary beneficiaries of the global AI infrastructure buildout, alongside Taiwan’s semiconductor sector. The city-state’s role as a data-center hub allowed it to capture significant capital inflows even as the broader labour-market impact of that investment stayed limited, given how capital-intensive AI infrastructure spending tends to be (J.P. Morgan Private Bank).
Why the AI cycle didn’t stay contained to Singapore
What is changing in 2026 is the geography of that investment. J.P. Morgan’s Asia outlook notes Southeast Asian economies — traditionally anchored in commodities and export manufacturing — are now aligning more closely with the global AI investment cycle by deepening involvement in higher-value areas: infrastructure, hardware and complementary supply chains (J.P. Morgan Private Bank).
Land constraints in Singapore make expansion difficult, which is precisely where the Johor-Singapore Special Economic Zone becomes central to the region’s AI investment thesis rather than a side story.
The Johor SEZ as capacity release valve
Johor has launched a 7,300-acre innovation sandbox as part of the new special economic zone bordering Singapore, explicitly designed to combine Johor’s land and scale with Singapore’s capital and speed, according to the state investment committee’s chair (Fortune). One local official described the ambition bluntly: the zone is meant to be more than “an industrial park with a nicer brochure” (Fortune).
Malaysia’s structural beneficiary position
Malaysia’s electrical and electronics sector already accounts for roughly 40% of the country’s total exports, with semiconductors comprising about 65% of E&E exports — positioning Malaysia as a structural beneficiary of the AI-linked shift in regional trade, according to J.P. Morgan’s Asia analysis (J.P. Morgan Private Bank). Malaysia’s economy minister has framed 2026 explicitly as a year of “execution” for the Anwar administration as it tries to lock in these policy gains (Fortune).
Monetary policy backdrop supports the buildout
Asian central banks spent much of 2025 easing policy and are entering the final stages of that cycle in 2026, shifting more of the growth-support burden to fiscal policy — a backdrop J.P. Morgan expects to support stronger domestic credit growth and consumer demand across the region, reinforcing rather than competing with the AI capital cycle (J.P. Morgan Private Bank).
The regional risk to watch
Most of the region avoided the brunt of 2025’s tariff shock thanks to exemptions on semiconductors, electronics and pharmaceuticals, but that exemption structure remains a policy choice in Washington rather than a permanent feature — meaning the Singapore-Johor AI corridor’s growth case still carries meaningful US trade-policy risk that investors should not discount simply because 2025’s tariffs were absorbed relatively smoothly (J.P. Morgan Private Bank).
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Analysis
Why Global Family Offices Are Converging on Dubai in 2026
Dubai’s transformation from oil-adjacent trading post to global capital hub is no longer a talking point — it is a measurable trend. The emirate’s newly launched Economic Survey 2026 shows GDP climbing to $265 billion alongside rising employment, while international family offices are gathering for the Family Office Summit Dubai 2026 as the city cements its position as a family-wealth hub (Gateway Group; Arabian Business).
The non-oil growth engine
The UAE enters 2026 with the World Bank projecting national growth of roughly 5%, well above the global average, driven substantially by 5.3% expansion in the non-oil sector (Barchart). Technology, green energy and healthcare are the top-performing sectors, and 64% of UAE executives expect trade volumes to exceed 2025 levels — confidence underpinned by the country’s expanding network of Comprehensive Economic Partnership Agreements (Barchart). Historically, oil production accounted for half of Dubai’s GDP; today it contributes less than 1% (Wikipedia/Economy of Dubai).
Why family offices specifically are relocating
The Family Office Summit Dubai 2026 is drawing international participants precisely because the emirate has built regulatory infrastructure — inside jurisdictions like the DIFC — designed to attract exactly this category of capital. As one DIFC executive noted, incentives alone are no longer enough to win global finance; institutional credibility and regulatory clarity now matter more, which explains why firms such as Sixth Street have opened Abu Dhabi offices as global investment houses deepen their Middle East presence (Gateway Group).
Infrastructure is compounding the pull
Beyond finance, the UAE’s infrastructure build-out is reinforcing the wealth-hub thesis. Etihad Rail’s Abu Dhabi–Fujairah passenger service and the Madinat Zayed and Liwa station openings, arriving ahead of schedule, signal a state execution model that investors increasingly cite as a differentiator versus regional peers (GCC Business Watch). Dubai has also rolled out a AED 1 billion economic support package aimed at business liquidity and resilience amid regional geopolitical headwinds (GCC Business Watch).
The regional competition for capital
Dubai’s rise is happening alongside — not in isolation from — a broader Gulf capital race. Saudi Arabia’s economy is set for stronger growth per IMF assessments, and Gulf sovereign and corporate capital is increasingly being deployed across sectors from AI infrastructure to green growth commitments, meaning Dubai’s wealth-hub status will need continual reinforcement rather than passive maintenance (GCC Business Watch).
The bottom line for investors
For family offices weighing jurisdiction, Dubai’s pitch in 2026 combines three elements rarely available together: near-zero effective taxation, a non-oil economy growing faster than most G20 peers, and physical and financial infrastructure being built ahead of demand rather than in reaction to it. That combination — not simply low tax rates — is what is now pulling global family wealth toward the emirate.
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