Economy-wide Effects of Fossil Fuel Price Shocks on Macro, Sectoral and Household Welfare
Citation: Raihan, S., Ahmed, M. T., & Razib, M. (2026). Economy-wide Effects of Fossil Fuel Price Shocks on Macro, Sectoral and Household Welfare. SANEM Publications, Dhaka, Bangladesh.
Bangladesh relies heavily on imported fossil fuels. Its dependence on primary energy imports rose from 47.7% in FY2020–21 to 62.5% in FY2024–25. This increases its exposure to global price volatility. Against this backdrop, this study investigates the economy-wide effects of fossil fuel price shocks on Bangladesh’s macroeconomy, productive sectors, and household welfare.
Using a Computable General Equilibrium (CGE) model calibrated to the 2022 Bangladesh Social Accounting Matrix, the study simulates three clearly defined price-shock scenarios. The Short-Term Energy Price (STEP) shock represents an immediate and large increase in fossil fuel prices, modelled after the 2022 Russia–Ukraine war’s impact: a 39.15% increase in crude oil, a 102.32% increase in natural gas, and a 143.28% increase in coal. The Medium-Term Energy Price (MTEP) shock captures the persistence of elevated energy prices in 2024, compared to pre-crisis levels in 2019: a 22.39% increase in crude oil, 39.65% in natural gas, and 23.92% in coal. The Long-Term Energy Price (LTEP) shock reflects average annual growth in global fossil fuel prices over 2015–2025: 3.83% for crude oil, 4.29% for natural gas, and 6.64% for coal.
The simulation results show that sharp price spikes disrupt the macroeconomy: GDP falls by 0.79%, inflation rises by 1.19%, and terms of trade worsen in the short term. Energy-intensive sectors, such as food processing, construction, and transportation, are experiencing the largest contractions, while mining and solar electricity are expanding. The welfare impacts are regressive; poorer, rural, and farm households bear disproportionately greater losses in real income and consumption. Impacts and disruptions decline notably over the medium and long term.
Policymakers must implement coordinated responses: deploy countercyclical fiscal measures, tighten monetary policy to contain inflation, increase exchange rate flexibility to support exports, offer targeted relief for vulnerable sectors, and establish an Energy Transition Fund to accelerate renewable energy adoption.