War in Iran Could Hit Some of Asia’s Biggest Economies Hard

Asia’s four largest economies are likely to be hardest hit by the latest war with Iran. This is because they are most dependent on energy imported through the Strait of Hormuz.

About 75-80% of oil and 59% of liquefied natural gas passing through the strait are destined for Japan, South Korea, India and China.

According to Zero Carbon Analysis, Japan, which accounts for 87% of fossil fuel imports, and South Korea, which accounts for 81%, are the two countries most at risk. India and China, which get half their oil from Iran, would also be significantly affected, especially if the strait is blocked.

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Oil prices have soared 10%, with Brent crude reaching over $70, and JPMorgan Chase said if the conflict continues, prices could reach $120 a barrel.

The Strait of Hormuz is the main channel for oil exports from Saudi Arabia, Iraq and Iran. This road is very narrow and is the only channel for LNG Qatar and the United Arab Emirates Access global markets.

Iran partially closed the strait for several hours in the middle of last month to conduct military drills, “and the government reportedly said closing the strait would be “Easier than drinking a glass of water”.

Analyst Dan Alamariu just published a report Oxford EconomicsZeng said that although the current conflict is larger and more intense than the 12-day war that broke out last year, he believes it “may last one to three weeks, up to two months.”

Dramatic changes in shipping and aviation

According to reports, more than 200 oil tankers have been idle or anchored near the strait, and another 170 container ships are trapped there.

This is likely an optimistic outlook. If Iran wants to prolong the economic fallout, oil prices could trigger a broader economic shock, like the war in Ukraine.

The implications extend beyond energy costs. Analysts say that every $10 increase in oil prices will lead to an increase in Asia’s inflation rate of 0.1 to 0.9 percentage points, with Thailand, Vietnam and South Korea all affected.

Major shipping companies such as Maersk have avoided the strait and rerouted around the Cape of Good Hope, which will add 10 to 15 days to the voyage and significantly increase fuel and insurance costs. The additional fuel cost per voyage is approximately $1 million.

There are also more than 400,000 containers carrying chips and electric vehicle battery components on ships in the Gulf. Nitrogen fertilizer exports to South Asia are also reportedly disrupted purchase Magazine.

According to Mitsubishi UFJ Research Center, air freight costs for India’s exports have reportedly soared 400% in the past two days, and the impact on the aviation industry has also been severe. The closure of airports and airspace in the Gulf has led to the cancellation of thousands of flights as the Gulf region is a major corridor between Asia and Europe.

Currency impact, inflation risk

Several Asian currencies including the Indian rupee, South Korean won and Philippine peso were negatively affected as the trade deficit increased.

Asian stocks fell on Monday, while gold prices soared to $5,400 an ounce.

Reuters reported that if the inflationary shock persists, it may force the Federal Reserve and the European Central Bank to suspend interest rate cut plans or even consider raising interest rates, while a long-term closure of the strait may trigger a global recession.

According to reports, Iran’s economy is close to collapse. The rial has fallen to record lows, trading at more than 1 million rials to the dollar on street markets.

The cost of rebuilding infrastructure such as airports, power grids and refineries is estimated to be in the tens of billions of dollars, with inflation exceeding 40-50%. There was widespread unemployment, severe food shortages, and social unrest.

Beyond these immediate painful effects, there may be some positive outcomes if the crisis leads countries to move to electricity more quickly.

“Increasing renewable energy deployment and pursuing electrification are strategic options for oil and gas importing countries to reduce their vulnerability,” Zero Carbon Analysis said.

“Especially in a situation like this Price-sensitive South and Southeast Asian countries. For people like Pakistan who have gone through Solar energy will usher in unprecedented prosperity in 2025renewable energy sources such as solar energy provide Cheaper, more reliable and more straightforward solution,” it said.

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Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd newspapers in Sydney, Perth, London and Melbourne before traveling to South East Asia in the late 1990s. He served as a senior editor at The Nation for more than 17 years.