ESHOCKID26 is the calibrated stock-and-flow model behind this paper. Set the oil price and the policy levers — pass-through, transfers, financing — and it runs the monetary and fiscal loops so you can see where the shock is routed and what it costs. Opens in a new tab.
Abstract
In February 2026, a war in the Middle East and the closure of the Strait of Hormuz drove global oil and gas prices sharply higher. This paper examines how that distant shock reaches the Indonesian economy and its public finances.
It first maps Indonesia's energy exposure — a country that imports most of its liquid fuel, much of it refined in the hubs of Singapore and Malaysia, even as it exports coal and gas in abundance — and then traces the shock's propagation through the tools of system dynamics: a causal loop diagram of the economy's feedback structure and a calibrated stock-and-flow simulation run across three oil prices ($70 before the war, $100, and $150 per barrel).
The simulation finds that the shock is routed rather than absorbed. Balancing monetary loops keep the rupiah and inflation from spiraling — they overshoot and then settle — but a reinforcing fiscal–growth loop, fed by Indonesia's capped fuel and LPG prices, pushes the budget deficit past its three percent legal ceiling and makes the damage persist; the $100 case closely matches the conditions Indonesia is already living through in mid-2026. The burden falls regressively on households even as a coal-and-LNG export windfall cushions the national accounts.
The paper concludes that the lasting cost is substantially a matter of policy: steering the shock out of the fiscal loop through a managed, partial price pass-through, protecting low-income households with targeted cash transfers, financing that protection from the export windfall, coordinating monetary and fiscal policy, and reducing the structural import dependence that makes Indonesia a transmission line for distant conflicts.
The system dynamics model on which this paper is based, ESHOCKID26, is available here.