The Strait of Hormuz Crisis and Nepal’s Emerging Energy Opportunity

The Strait of Hormuz has once again become an epicenter of global geopolitical uncertainty. Recent re-escalation of the tensions between Iran, the United States and their regional allies at the Strait; the Houthi Red Sea blockade and attacks in multiple choke points have again demonstrated the sensitivity of international oil prices. Brent crude, which had retreated to around USD 70 per barrel, or at the pre-war level following earlier diplomatic de-escalation, has again experienced upward pressure, rising to over USD 90 per barrel.

For countries heavily dependent on imported fossil fuel, the implications extend well beyond higher petroleum bills. Rising oil prices increase transportation costs, manufacturing expenses, logistics charges, construction costs and ultimately consumer prices. Fertilizer production, which relies heavily on natural gas, also becomes more expensive, putting additional pressure on agricultural production and food security. For Nepal, these developments deserve close attention.

Nepal remains one of the most import dependent economies. Imports exceed exports by nearly ten to one, making the country exceptionally vulnerable to external price shocks. Unlike many larger economies, Nepal has limited ability to absorb such shocks. Higher import bills widen the trade deficit, increase inflationary pressures and place additional strain on public finances. The 2021 reserve dilution due to surged import and nearing economic crisis comparable to Sri Lanka, reminds us of the strong correlation between intensifying import and external sector vulnerability.

The country’s dependence on remittance income creates another layer of vulnerability. West Asia is one of Nepal’s largest overseas labor destinations. According to official estimates, close to 2 million Nepali migrant workers are employed across the Gulf region, and remittances from this region constitute over 40% of Nepal’s foreign exchange earnings. Any prolonged geopolitical instability in the region threatens not only employment opportunities for migrant workers but also the remittance flows that have supported Nepal’s external sector for decades. These realities teach a broader policy lesson: Nepal cannot and should not indefinitely rely on imported energy and labor exports. Nepal must fundamentally reorient its growth strategy.

History shows that major energy crises have often served as catalysts for economic transformation. The oil shocks of the 1970s, for example, prompted many countries to invest in energy efficiency, diversify their energy mix, and accelerate the development of renewable and alternative energy sources. More recently, China has pursued one of the world’s most ambitious energy transition strategies, investing heavily in hydropower, solar and wind energy, ultra-high voltage transmission networks, electric vehicles, battery technologies, and strategic petroleum reserves. These investments have been driven not only by climate objectives but also by a long-term strategy to reduce dependence on imported fossil fuels and strengthen national energy security against geopolitical disruptions.

Nepal should draw an important lesson from this experience. While China has strengthened its energy security through large scale investments in diverse clean energy technologies, Nepal’s greatest strategic advantage lies in its abundant hydropower resources. With an estimated technically feasible hydropower potential of around 83,000 MW, of which approximately 43,000 MW is considered economically viable, Nepal enjoys a distinct comparative advantage in clean energy generation. This endowment should no longer be viewed merely as a source of electricity. Rather, hydropower should be positioned as the cornerstone of Nepal’s long term development strategy; driving industrialization, reducing dependence on imported fossil fuels, strengthening energy security, generating export earnings, and creating quality employment. In this sense, hydropower is not simply an infrastructure sector; it is one of Nepal’s most valuable strategic economic assets, with the potential to reshape the country’s growth trajectory.

Nepal has already started exporting surplus electricity to India and, on a limited scale, to Bangladesh. While cross-border electricity trade should continue to expand, Nepal’s greater economic opportunity lies in using clean and affordable electricity to power domestic industrialization. Rather than exporting electricity alone, Nepal should leverage its renewable energy and derivatives to develop energy intensive and value-added industries, including mineral processing, agro-processing, green fertilizers, data centers, electric mobility, and emerging green manufacturing. Such a strategy would not only reduce imports of fossil fuels but also strengthen industrial competitiveness, create quality employment, and expand export-oriented production.

Realizing this potential, however, requires more than increasing generation capacity. Nepal must develop the entire electricity value chain, from transmission and distribution infrastructure to reliable industrial connections and productive end use. At the same time, domestic electricity demand must be significantly expanded. With annual per capita electricity consumption of only around 400 kWh, among the lowest in South Asia, Nepal has considerable scope to electrify industry, agriculture, transport, and households. Accelerating electric transportation, irrigation, cooking, and industrial electrification would maximize the economic returns from the country’s hydropower resources. This can be the driving sector of Nepal’s entire economic ecosystem.

For West Asia, petroleum has shaped economic geography and geopolitical influence for decades. For Nepal, hydropower has the potential to play a comparable strategic role in the emerging climate change sensitive low carbon economy. As South Asia’s demand for clean electricity continues to grow, driven by rapid economic expansion and decarbonization commitments, Nepal is well positioned to become an important contributor to regional energy security through expanded cross border electricity trade and deeper regional power market integration. It will enhance Nepal’s strategic relevance within South Asia’s evolving energy landscape.

Realizing this vision, however, will require sustained policy commitment, institutional reforms, and substantial investment across the hydropower value chain. Nepal should mobilize concessional climate finance from multilateral climate funds, such as Green Climate Fund (GCF), Climate Investment Funds (CIF), Global Environment Facility (GEF), Adaptation Fund, and development partners such the World Bank, Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB), while leveraging innovative financing instruments, including green bonds and strategic monetization of Nepal Electricity Authority, and other assets. At the same time, stronger regional cooperation with China, India and other technologically advanced economies will be essential to facilitate technology transfer, investment, institutional reform, and market integration.

Against this backdrop, the recurring tensions surrounding the Strait of Hormuz are a timely reminder that global energy markets will remain vulnerable to geopolitical disruptions for the foreseeable future. Nepal cannot influence these external events, but it can determine how it responds to them. Rather than treating rising fuel prices as recurring external shocks, Nepal should seize this moment to accelerate investment across the entire hydropower value chain; from generation and transmission to industrial electrification and productive application.

History shows that countries that respond decisively to periods of global uncertainty often emerge stronger and more resilient. The Strait of Hormuz crisis should therefore be viewed not merely as an external risk, but as a strategic opportunity to reorient Nepal’s development model. By leveraging its abundant hydropower resources to drive industrialization, economic diversification, and the green transition, Nepal can transform a source of global uncertainty into a foundation for structural transformation, long term prosperity, and sustainable growth.