Why the Iran-US war strengthens Indonesia’s case for decarbonization
Beyond the environmental benefit, it could achieve energy affordability and industrial competitiveness
The author is the co-founder of Lestari Advisors and a PhD student at Monash University. This article reflects the author’s own analysis and views and does not necessarily represent those of The Reformist.
The recent escalation of tensions around Iran and the Strait of Hormuz is often framed as a geopolitical risk for oil markets. But for Indonesia, it is better understood as a stress test of structural exposure, unveiling the need to move away from coal dependence and treat decarbonization as a key to maintain industrial competitiveness. Let me explain:
Indonesia has long wrestled with a quiet yet consequential problem: premature deindustrialization. Manufacturing peaked early, way before the country could fully capture the productivity gains typically associated with industrial transformation. Data show Indonesia’s manufacturing share at about 19 percent of GDP in 2024, down from a historical peak of 32 percent in the early 2000s.
In recent years, the government has responded with a renewed ambition, placing downstreaming at the center of its economic strategy. Indonesia aims to move up the value chain and reclaim industrial momentum by prioritizing strategic sectors, including fisheries, agriculture, energy, and mineral-based industries. The scale is significant. Government estimates suggest that downstreaming initiatives could mobilize close to Rp 600 trillion (~US$ 35 billion) in planned investment, positioning Indonesia as a key node in global supply chains linked to the energy transition.
But as I reflect on this strategy, I find myself returning to a critical tension that is often left unspoken: while downstreaming is framed as a forward-looking industrial policy, its energy foundation remains firmly rooted in fossil fuels.
Much of Indonesia’s mineral processing industries, particularly nickel, is powered by captive coal plants, built specifically to supply industrial operations. The data is striking: captive coal capacity has expanded rapidly in recent years, reaching around 30 GW when including projects in development, with nickel smelters alone accounting for a significant share. In effect, coal is embedded in the very architecture of Indonesia’s industrial strategy.
This matters because energy is an important determinant of competitiveness. If the industries Indonesia is betting on are structurally tied to carbon-intensive energy, then fossil fuel dependence is more than an environmental issue. It is shaping the future viability of those industries.
This is where events far beyond Indonesia’s borders suddenly become relevant.
The Strait of Hormuz carries roughly 20 million barrels of oil per day (about a quarter of global seaborne oil trade) and nearly 20 percent of global LNG flows. Around 80 percent of that oil is destined for Asia. Any disruption, even temporary, sends shockwaves through global prices.
Indonesia may not import all its oil directly from the Middle East, but it does not need to. As a net oil importer, Indonesia is exposed primarily through prices, not routes. And those price shocks have real consequences. A research shows that a 10 percent increase in global oil prices can lead to roughly a 3 to 4 percent increase in Indonesia’s consumer price index (CPI) over time. The transmission mechanisms are well understood: higher subsidy burdens, adjustments in administered fuel prices, rising transport costs, and broader inflation expectations.
The fiscal implications are equally significant. Estimates suggest that even a modest US$ 1 increase in oil prices can add about Rp 7 trillion to Indonesia’s fiscal burden, once subsidy and compensation mechanisms are taken into account. In other words, oil price volatility is not just an abstract risk anymore. It directly affects Indonesia’s budget, inflation, and macroeconomic stability.
What strikes me is how this intersects with Indonesia’s long-standing policy approach.
For decades, energy policy has been anchored in a simple logic: affordability supports growth. Fuel subsidies, price controls, and compensation mechanisms have been used to shield consumers and industries from global volatility. This has delivered short-term stability, but it has also entrenched a deeper vulnerability. When affordability depends on global fossil fuel prices, stability becomes contingent on forces outside Indonesia’s control.
The lesson from Hormuz, then, is not that Indonesia needs to secure more fossil fuel supply. It is that fossil fuel dependence itself is the source of insecurity.
This raises a more fundamental question: if not cheap fossil fuel, what should underpin Indonesia’s growth?
Here, international experience offers useful contrasts. Malaysia, for instance, has historically relied on subsidies to maintain affordable energy. While effective in the short term, this approach has imposed persistent fiscal costs and required repeated reforms. China, on the other hand, has pursued a different trajectory. Over the past two decades, it has systematically invested in energy efficiency, electrification, and industrial upgrading, enabling economic growth to increasingly decouple from energy consumption growth.
For Indonesia, the implication is not to abandon affordability, but to redefine how affordability is achieved. Stable, predictable, and increasingly domestic sources of energy, particularly from renewables, offer a more durable foundation than imported fossil fuels subjected to geopolitical risk.
This is where decarbonization takes on a different meaning.
Too often, decarbonization is framed narrowly as a climate agenda. But in the context of Indonesia’s current trajectory, decarbonization is fundamentally about industrial competitiveness. If downstreaming continues to rely on coal-based power, Indonesia risks locking itself into a high-carbon production model just as global markets shift toward low-carbon supply chains. Investors, buyers, and regulators are increasingly sensitive to the carbon intensity of production. What is competitive today may not be competitive tomorrow.
At the same time, the opportunity is equally clear. There is growing evidence that renewable energy can support the next wave of economic growth, particularly when combined with efficiency improvements. Energy efficiency alone is estimated to deliver returns of three to five times the initial investment, while reducing overall system costs.
For industrial sectors, this translates into lower operating costs, greater resilience to price shocks, and improved market positioning.
In practical terms, this means Indonesia’s industrial policy must evolve. Downstreaming should focus beyond scaling production towards transforming the energy systems that power it. Reducing reliance on captive coal, integrating renewable energy into industrial zones, and prioritizing efficiency are not peripheral adjustments anymore. These efforts are central to ensuring that Indonesia’s industrial strategy remains viable in a changing global landscape.
As I think about the implications of the Iran crisis, I do not see it as an isolated geopolitical event. I see it as a signal that reinforces a broader pattern we have witnessed repeatedly. Fossil fuel dependence exposes countries to risks that are increasingly difficult to manage, whether through fiscal policy, subsidies, or market interventions.
For Indonesia, the response should not be reactive. It should be strategic. Decoupling from fossil fuels, particularly oil, will reduce exposure to external shocks. Investing in clean, reliable, and efficient energy systems will strengthen industrial competitiveness. And doing so while maintaining Indonesia’s non-bloc foreign policy stance will preserve the country’s strategic autonomy in an increasingly fragmented world.
In the end, the question is not whether Indonesia can afford to decarbonize.
It is whether Indonesia can afford not to.
Because in a world shaped by both energy transition and geopolitical uncertainty, the countries that succeed will not be those that simply extract resources but those that build resilient systems around them.
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