Strait of Hormuz energy shock could short-circuit Asia’s industrial momentum

The fast-evolving Middle East war initiated by the United States and Israel against Iran is not only a geopolitical crisis. For much of Asia, it is an immense energy shock. Brent crude has climbed to multi-year highs over the past two weeks and whipsawed with constant news flow from US headlines. But oil prices capture only part of the macroeconomic story for Asia. Asia’s economic stability remains tightly linked to Middle Eastern energy flows, and disruptions to those flows threaten not just fuel costs but electricity supply and the region’s industrial cycle.

China’s diplomatic posture so far reflects that reality. Foreign Minister Wang Yi has emphasized regional stability and the right of Gulf states to self-defence. The message is pragmatic: one of China’s priorities is to prevent escalation that could disrupt the energy corridor linking the Middle East to Asia.

That corridor is central to the region’s economic architecture. The Strait of Hormuz remains one of the most important energy choke points in the world. Roughly 85 percent of the crude oil and 80 percent of liquefied natural gas moving through the strait ultimately flow to Asian markets, according to the US Energy Information Administration.

China, India, Japan and the Republic of Korea together account for the majority of those flows. China alone sources more than half of its crude imports from the Middle East, with around 40 percent passing through Hormuz. Japan and the ROK are even more exposed: Japan imports nearly all of its oil and historically about 80 percent of that supply transits the strait.

In macroeconomic terms, that concentration creates a clear vulnerability. Any sustained disruption would translate quickly into a regional shock to trade balances, inflation and industrial costs.

So macro risks are clearly skewed to the upside as the war drags on. Higher crude prices represent a classic terms-of-trade deterioration for energy-importing economies. When oil prices rise, income effectively transfers from importers to producers. In Asia’s case, that translates into weaker current accounts, higher import costs and pressure on corporate margins.

Under the Oxford Economics latest working assumptions, the conflict remains unpredictable but ultimately contained over the next two months. This oil shock however, is meaningfully stagflationary in the short-term, lifting regional inflation for the year and driving growth downwards. Some key mitigants explain why this shock isn’t larger.

For one, governments across the region actively buffer energy price shocks. Subsidies, stabilization funds and state-owned energy companies absorb part of the global price increase before it reaches consumers. India’s oil marketing companies often smooth crude price volatility. Indonesia maintains significant fuel subsidies. Thailand operates a fuel stabilization fund designed precisely for this purpose.

These fiscal shock absorbers explain why the historical relationship between global oil prices and domestic inflation has been weaker in many Asian economies than in advanced Western markets.

However, these buffers do not eliminate the adjustment.

Energy subsidies ultimately shift the burden to public balance sheets. Fiscal costs accumulate through larger subsidy bills or reduced revenues from state-owned energy companies. The adjustment typically reappears later through subsidy reform, regulated price increases or fiscal consolidation. What looks like a muted inflation shock today often re-emerges later through policy tightening.

The larger vulnerability in the current crisis may lie elsewhere.

Electricity systems across Northeast Asia rely heavily on imported LNG. Japan and the ROK depend on gas-fired generation to maintain both baseload supply and grid flexibility. Disruptions to cargo flows through the Strait of Hormuz introduce the risk of a physical supply shock rather than simply higher prices.

The LNG market is structurally rigid. Liquefaction plants, specialized shipping fleets and regasification terminals form a tightly constrained supply chain. When disruptions occur, physical cargoes cannot easily be rerouted. Utilities must compete for replacement supply in volatile spot markets.

The scale of the exposure is substantial. Around 20 percent of global LNG trade passes through the Strait of Hormuz, largely from Qatar, one of the world’s largest exporters. More than 80 percent of Qatar’s LNG exports are delivered to Asian buyers.

That concentration means even temporary disruptions can create outsized price volatility. After the Ukraine crisis, Asian spot LNG prices briefly exceeded $60 per MMBtu as buyers competed with Europe for limited cargoes. Many analysts now warn that the current conflict could trigger the most severe gas market disruption since that episode. QatarEnergy has already declared force majeure on LNG shipments after disruptions to shipping routes and facilities, removing a significant share of global supply from the market.

For Asia, the implications extend well beyond energy costs. Gas-fired electricity supports many of the region’s most strategic industries. Semiconductor fabrication in the ROK, advanced electronics manufacturing and the expanding data-center ecosystem all require highly stable power supply.

Electricity volatility therefore transmits quickly into industrial output. Energy-intensive manufacturing clusters cannot easily absorb sudden swings in power costs or reliability. Even small disruptions can ripple through global technology supply chains.

China is somewhat less exposed to LNG disruptions than its Northeast Asian neighbors. Domestic gas production has risen steadily, and pipeline imports from Central Asia and Russia provide additional supply diversification. Still, roughly 30 percent of China’s LNG imports arrive via routes linked to the Strait of Hormuz, leaving parts of the economy exposed to maritime disruptions.

Sectors such as fertilizers, chemicals and petrochemicals are also particularly sensitive to gas price volatility.

The timing matters. Over the past year, Asia has been one of the few regions delivering consistent industrial momentum. Semiconductor exports, electronics manufacturing, and artificial intelligence-related hardware investment have supported a technology-led upswing in regional production.

A sustained disruption to LNG supply risks weakening that cycle. The transmission channel would not primarily be inflation, but rather energy availability and rising marginal production costs across Asia’s industrial base.

The author is the head of Asia Economics at Oxford Economics.

The author contributed this article to China Watch, a think tank powered by China Daily. The views don’t necessarily represent those of China Daily.

Contact the editor at editor@chinawatch.cn.