Fuel storage tanks at an Esperanca Timor Oan (ETO) facility in Hera, Timor-Leste (Dimas Ardian/Bloomberg via Getty Images)

The oil shock to Timor-Leste’s economy

The Petroleum Fund may still look healthy on paper, but Timor-Leste is drawing it down faster than it can afford.

João Boavida

24 March 20263 min read

Timor-Leste is entering a decisive and consequential phase of its economic trajectory. As global tensions linked to the Iran war push up energy prices and unsettle markets, the country faces renewed exposure – this time without the cushion of active oil production and revenue.

Timor-Leste is no longer an oil producer in any meaningful sense. The fields that once sustained public finances are largely depleted, and no major new production has come on stream. What remains is not a flow of revenue, but a stock: the Petroleum Fund.

As of late 2025, the fund stood at approximately US$18.91 billion, having fallen by US$340 million in the final quarter. On paper, this appears reassuring. But a finite reserve now carries the full weight of national expenditure in the absence of replenishing revenues.

Withdrawals from the fund have become the backbone of the state budget. While this has sustained public spending and preserved stability, it has also entrenched fiscal dependence. Without reform, current drawdown trends risk exceeding sustainability thresholds, particularly in a more volatile global environment. The International Monetary Fund has warned that the Petroleum Fund could be exhausted by the late 2030s.

The Petroleum Fund may function as a macroeconomic buffer, but it does not shield households from rising living costs or economic uncertainty.

The Iran war sharpens these risks. As an import-dependent economy, Timor-Leste is highly exposed to external price shocks. Rising global fuel costs are already feeding into higher transport prices, increasing the cost of basic goods, and placing pressure on household incomes. For many Timorese families, particularly in urban centres such as Dili, these pressures are immediate. The Petroleum Fund may function as a macroeconomic buffer, but it does not shield households from rising living costs or economic uncertainty. The gap between national wealth and lived experience is widening.

The more consequential test lies in governance. The Petroleum Fund was designed as a stabilisation mechanism, not a permanent substitute for a diversified economy. Yet sustained reliance on withdrawals has delayed investment in sectors capable of generating sustainable growth and employment. Without a broader productive base, external shocks – whether from geopolitical conflict, commodity price volatility, or global financial tightening – are transmitted rapidly into Timor-Leste’s economy through imports and supply chains.

Economic stress also carries secondary risks. Where formal opportunities remain limited, informal and illicit economic activity often expands. This includes the potential growth of organised crime and illegal gambling networks, particularly among economically marginalised groups. Such dynamics are not inevitable, but they become more likely in the absence of inclusive economic pathways and robust regulatory oversight.

Timor-Leste’s recent accession to the Association of Southeast Asian Nations (ASEAN) sharpens both opportunity and exposure. Integration into regional markets offers long-term potential for diversification, investment, and growth. In the short term, ASEAN membership increases exposure to competition, price volatility, and external shocks transmitted through trade and financial channels.

The Petroleum Fund remains a critical national asset, but its role must evolve from financing recurrent expenditure towards enabling structural transformation.

Three broad priorities stand out as enduring challenges.

First, fiscal discipline must be strengthened to ensure withdrawals remain aligned with long-term sustainability benchmarks. A continued over-reliance on the Petroleum Fund risks eroding its capacity to support future generations.

Second, targeted investment in agriculture, tourism, and small-scale industry, combined with improvements in infrastructure and the business environment, will be essential to reducing import dependence and creating employment.

Third, reinforcing governance frameworks, including by strengthening regulatory oversight, enhancing transparency in public spending and addressing vulnerabilities to illicit economic activity.

For regional partners, including Australia and ASEAN member states, Timor-Leste’s trajectory warrants closer attention. Economic instability in small, highly exposed economies can carry broader implications for regional resilience, migration pressures, and transnational crime. Supporting Timor-Leste’s transition through investment, technical cooperation, and market access aligns with wider Indo-Pacific stability interests.

Timor-Leste is not in crisis. But it is approaching a critical threshold.

About the author

João Boavida

João Boavida is Founder and Executive Director of CEPAD, a Timor-Leste civil society organisation promoting peacebuilding, governance, and civic participation ( www.

Topics

Timor-Leste