Monday’s naval blockade of the Strait of Hormuz is the latest escalation of the US/Israeli war in Iran. The economic consequences of the first six weeks of the war are stark. Oil prices have passed over $100 barrel following the failed peace negotiations. US inflation spiked to its highest rate in years. Fertilizer prices have surged over 50%. The United Nation warns of a ‘triple shock’ to the global economy caused by energy and food prices surging coupled with weak economic growth.
The war’s economic impact will not be uniform globally but rather is propagating based on extant supply chain structures and dependencies. For example, many Asian countries are much more dependent on oil from the Persian Gulf than the United States, which is the largest petroleum producer in the world. These countries, in turn, are among the world’s largest manufacturers and exporters, leading to potential supply chain disruptions beyond the energy markets. This post explores the knock-on effects of Asian energy dependence on the Strait of Hormuz, and how those disruptions may in turn impact the US economy.
Geographic Concentration Risks & Ripple Effects
In recent weeks, rallies have emerged across Asia, as populations protest the rise in oil prices. The energy spikes are putting pressure on existing reserves, with some countries holding less than one month of oil reserves. Thailand is rationing gasoline, while the Philippines has declared a national emergency. There is significant diversity in gas reserves and mitigation policies across Asia, as economies seek greater resilience to the energy shocks.
A review of the most dependent Asian economies on petroleum from the Persian Gulf can give an indication of some indirect effects of the war on the global economy. Below are the top ten Asian countries dependent on petroleum from Saudi Arabia, Iran, Kuwait, Iraq, the UAE, and Qatar as a percentage of their overall petroleum imports. The dependencies range from 20% to 80%, marking a strong geographic concentration risk across the entire list. Note this list is based on the most recent year of data available across the region, and that Vietnam has recently increased dependence on the region and would move into the top ten as well.
- Pakistan
- Nepal
- Japan
- South Korea
- Sri Lanka
- India
- China
- Philippines
- Malaysia
- Bangladesh
Energy shortages impact the power generation required to run economies, especially in countries that are heavily reliant on manufacturing. Asian economies most dependent on Persian Gulf oil are already feeling the greatest economic impacts of the war. The following are the top products exported from the region to the US based on value, highlighting how the US economy may be impacted beyond energy prices.
Top Products Imported by the US from Asian Countries Dependent on Persian Gulf Petroleum
- Passenger Vehicles
- Vehicle Parts
- Medical Supplies
- Toys
- Telephones
- Electric Accumulators
- Automatic Data Processing Machines
- Apparel
- Chemicals
- Communication Apparatus
As this short list demonstrates, from automative to healthcare, the industry impact is diverse and widespread. These products reflect some of the ongoing disruptions that have already surfaced. Lamborghinis are reportedly stranded in Sri Lanka while Chinese automotive exports are blocked from entering the UAE, their third largest destination, while imports of key parts are delayed.
Japan, South Korea, and Singapore are among the many countries experiencing instability in the naphtha supply chain – a key ingredient for plastics in medical devices – leading many companies to increase prices or seek alternative outputs. Medical supplies are also stuck in Dubai, unable to reach critical communities across the globe.
Japan’s Toto, which is famous for kitchens, bathtubs, and toilets, has announced that it has stopped taking orders due to a shortage of organic solvents, while snack maker Yamayoshi Sekia suspended six products due to difficulty procuring oil for machines. South Korean President, Lee Jae Myung, declared, “There is chaos all over the world because of energy issues. Frankly, it’s so serious that I can’t even sleep.”
Variations in Resilience
There is great variation in how vulnerable these economies are to energy shocks, with Malaysia and China maintaining robust strategic reserves and a current-account surplus. Nevertheless, given tight interdependencies, a prolonged war can disrupt even the most shielded economies. For instance, the Economist notes that China consumes more energy than the US, Russia, and India combined, and while government policies help shield their domestic economy, broader disruptions and higher oil prices could shave another .3% off China’s growth in industrial production. This comes at a time when China set its lowest economic growth rate in 35 years. While China has more entrenched protections against food and energy spikes, it may not be able to escape the third pillar of the triple shock – slow economic growth.
Last year, India’s Minister of Petroleum and Natural Gas noted, “We have diversified our supplies in the past few years…We will take all necessary steps to ensure stability of supplies of fuel to our citizens.” Nevertheless, India is facing inflation and a food crisis due to the fertilizer shortages. The Philippines is cutting fuel taxes and providing subsidies, as well as implementing a four-day work week to help offset the supply chain impact that sparked a national emergency declaration. Prior to the blockade, the Philippines was among several Asian countries that negotiated safe passage through the Strait, which is now at risk due to the blockade.
Looking Ahead
The fog of war, coupled with hyperspecialized and complex global supply chains, renders exact predictions and timing of the global economic impact of the war difficult. Nevertheless, energy dependencies and export patterns mirror nascent impacts that are already emerging from Asia. The US economy, already feeling the effects of inflation and energy spikes, soon may be hit with another wave of shocks due to the supply chain disruptions underway in Asia. A similar dive into European and other global regions equally highlights concentration risks and potential propagation effects. The devastation of war and the triple shocks to the global economy forewarns a broader humanitarian and economic crisis. We will continue to monitor these and update as the war persists.