Asia races to shield economies from Iran war oil shock as costs mount

Asian governments are moving rapidly to secure alternative energy supplies and protect their economies from the worst effects of the energy crisis caused by the Iran war. But for the world’s biggest oil-importing region, the cost of that protection is rising sharply.

The strain has already prompted the Asian Development Bank to lower its growth forecast for developing Asia and the Pacific to 4.7% this year and 4.8% in 2027, compared with its earlier projection of 5.1% for both years. The bank also raised its inflation forecast for this year to 5.2%.

Asia receives 85% of crude shipments from the Gulf, but Kpler data showed total oil imports into the region fell 30% year on year in April, hitting the lowest level since October 2015. The drop followed two months in which the Strait of Hormuz, a major chokepoint for one-fifth of global oil and gas supplies, was almost closed.

The impact is putting growing pressure on government finances, especially in South Asia, as authorities spend billions of dollars on fuel subsidies and import duty waivers to soften the shock for consumers and businesses.

“The first line of defence ... is that the governments decided to absorb the initial shock by either providing subsidies or cutting excise duties on fuel products,” said Hanna Luchnikava-Schorsch of S&P Global Market Intelligence.

In India, the largely state-controlled refining sector has kept fuel prices unchanged even as crude costs have surged. Refiners are losing about 100 rupees (US$1.06) per litre on diesel and 20 rupees per litre on gasoline, although some analysts expect price increases after the state elections ended in April.

Across the region, many governments have tried to curb fuel use or prevent hoarding. Several have also restricted exports, while others, including Australia, have backed diplomatic efforts to keep energy access open.

China, the world’s largest oil importer, has been cushioned by large reserves, diversified energy supply chains and restrictions on exports of fuel and fertiliser. Beijing, however, is allowing some exceptions for regional buyers, including Australia and Myanmar.

Goldman Sachs said Asia’s economic hit from the war has so far been less severe than feared, even as governments draw on fiscal resources, foreign exchange reserves and oil inventories.

Even so, the bank cut its 2026 growth forecasts for Japan and some Southeast Asian economies, while slightly raising inflation expectations. It also warned that one important issue remains unclear.

“How much of the resilience thus far reflects structural factors versus unsustainable declines in buffer stocks?” Goldman Sachs analysts said in a note.

First buffers under strain

Asian emerging-market currencies have weakened more sharply than both global peers and the region’s larger currencies. The peso, rupee and rupiah have all fallen to record lows against the dollar.

Since the war began at the end of February, the Philippine peso has lost more than 5%. The Thai baht and the rupee have each dropped more than 3%, while the rupiah is down more than 2.5%.

China’s yuan has been the strongest performer in the region, rising 0.8% against the dollar. Japan has intervened to support the yen, which is now 0.4% above its pre-war level. South Korea’s won has fallen about 1.1%.

S&P Global Market Intelligence said Pakistan, Bangladesh and Sri Lanka are the South Asian economies most exposed to the financial burden created by the energy squeeze.

Pakistan, for instance, recently issued its first tenders since 2023 to buy liquefied natural gas, as it seeks to replace supplies it cannot obtain from Qatar. It paid US$18.88 per million British thermal units for one cargo, roughly US$30 million more than pre-war market prices, according to Reuters calculations.

“These countries use more of their resources on subsidising domestic public energy enterprises and basically shielding the final consumers from the energy price shock,” said Luchnikava-Schorsch, S&P Global Market Intelligence’s head of Asia-Pacific Economics.

“These are also the countries which have the slimmest fiscal buffers.”

She added, however, that regional economies are in a stronger position than they were in 2022, when the start of the Ukraine war triggered the previous major energy shock.

Different countries, different responses

Asia’s response has varied according to each country’s energy position and supply needs.

Indonesia, an energy producer, has instructed operators to prioritise the domestic market rather than exports. It is also stopping LNG shipments that are not covered by contracts.

Southeast Asia’s largest economy is seeking Middle East oil replacements from Africa and Latin America, and plans to buy 150 million barrels from Russia by the end of the year.

In Thailand, a source at a state-owned refiner said the company had suspended crude purchases after national refined-product stocks increased. Inventories rose after refineries lifted output and a government ban shut off exports.

The same source said energy-use restrictions and high prices had also pushed demand lower.

Japan, which buys 95% of its oil from the Middle East, has increased purchases of US crude. Those cargoes come at spot-market prices that jumped after the war began, plus higher shipping costs from the United States, where delivery takes twice as long as from the Gulf.

On Friday (May 1), Japan started releasing 36 million barrels of crude from stockpiles, its second release since the war began.

By Tony Munroe and Florence Tan

Reuter