WHILE the war against Iran is being fought by the United States and its partners in the Middle East, the economic impact of the conflict is being predominantly felt in Asia and threatens to send the region into crisis, Singapore's Foreign Minister Vivian Balakrishnan said on Monday (March 23).
The U.S.-Israeli war on Iran is now entering its fourth week, with no clear end in sight, shutting down the Strait of Hormuz through which 20% of the world's oil and liquefied natural gas flow, pushing up oil prices and raising fears of a renewed spike in global inflation.
While the United States has become a net energy exporter, and Europe has several other alternative sources, the trade-heavy economies in Asia are far more reliant on oil from the Middle East.
Asia, the top oil importing region, sources nearly 60% of its crude and petrochemicals feedstock from the Middle East. That exposure has led countries including China to halt refined fuel exports, while numerous petrochemicals plants and refineries in the region have scaled back operations or declared force majeure.
Reuters reporting shows around 80% of oil shipped through the Strait of Hormuz heads to Asian buyers.
"The vulnerability has been known, but it's never been tested to the extreme that it is being tested today," Balakrishnan said, adding that much would be determined by whether U.S. President Donald Trump followed through on his warning to destroy Iranian power plants if the Strait of Hormuz was not open to all shipping by around 2345 GMT on Monday. In turn, Iran said it could attack Israel's power plants and plants supplying U.S. bases in the Gulf.
"If indeed you get tit for tat destruction of energy infrastructure, then you're dealing not only with an immediate blockage of the straits, but scarring of energy infrastructure from the Middle East which means a prolonged period in which energy exports will be diminished," Balakrishnan said.
That would mean higher oil and gas prices, as well as greater inflation across the board, he said.
Balakrishnan said it is too early to tell if the situation will deteriorate to the levels of the 1997-1998 Asian financial crisis, which sent many countries in the region into recession and spread to the global economy. But Singapore is dusting off contingency plans to not only weather the storm, but look for opportunities as well, he said.
Planning scenarios are framed around the next 18 hours, three months, and then the next three years, but Singapore aims to play to its strengths by relying on fiscal conservatism, international cooperation, and adapting to changes in global supply chains, he said.
Countries in Asia need to accelerate the push for renewable energy, boost power grids, update digital infrastructure, and retrain the labour force, while also keeping government coffers balanced and preventing runs on their economies or currencies he said.
Balakrishnan said he was disappointed that talks broke down between the United States and Iran. "I will confess that I was surprised with the onset of hostilities. I didn't think it was necessary. I don't think it's helpful, and even now, there are even doubts expressed about the legality of the situation."
Singapore is a longtime U.S. investment and security partner, including extensive military training, logistics support, and intelligence sharing. It also trades heavily with China, and Balakrishnan said it is not in Singapore's interest to be forced to choose sides.
