THE ECONOMIST: The Iran war has put Asia on the brink of an energy panic

Now onto its second week, the American-Israeli war with Iran has all but stopped seaborne oil exports from the Gulf’s big producers.

As trading resumed after the weekend the price of Brent crude, the global benchmark, leapt above $US100 a barrel ($143). It is up by 37 per cent over the past week.

American motorists are already paying over $US3.40 for a gallon of petrol on average ($1.40 a litre) around US50 cents more than on February 27. In Europe prices of natural gas, of which the Gulf normally ships lots in liquefied form, are 64 per cent higher than before the war.

The nastiest effects of the energy shock, however, are being felt in Asia. The Gulf supplies 40-80 per cent of the seaborne crude imports of China, India, Japan and South Korea. It also accounts for nearly a third of China’s LNG imports, more than half of India’s and much more for some smaller Asian countries.

In 2025 Asia absorbed 87 per cent of the crude and 86 per cent of the liquefied natural gas (LNG) transiting via the Strait of Hormuz. Now the strait is blocked and Asia risks running out of fuel, fast. Many governments and firms see a grave threat—and are struggling to respond. The knock-on effects on their economies could be profound.

One way to gauge anxiety is to look at the gap in prices of different grades of crude in different places. The Omani variety — still available in decent volumes because Oman’s export terminals sit outside the Gulf — usually trades at a discount to Brent, which is less viscous (“lighter”), less sulphurous (“sweeter”) and so easier to refine. Today Omani oil is much dearer than Brent as Asian refiners, whose plants are often set up to process similar grades from Oman and other Gulf producers, vie for dwindling supplies.

Evaporating Gulf supply is leading Asian refiners to look farther afield. After spending months pressing India to stop buying Russian crude, the Trump administration on March 5 gave the country a 30-day waiver to resume purchases. But if President Donald Trump was hoping that the near-record volume of Russian oil floating around the world for want of buyers would plug the gap and ease pressure on global energy prices, the ploy has not worked.

In normal times America’s main grade, West Texas Intermediate (WTI), flows mostly to Europe, which outbids Asia for these light and sweet American barrels. Since the war began, Asian buyers have been offering to pay more than Europeans, despite WTI being less well suited for their plants and producing less of their desired output. Chinese ones are now paying $US103 a barrel for WTI. It is no longer possible to buy a barrel of any grade in China for less than $US100 (except for embargoed Russian and Iranian stuff). A barrel of Omani oil costs over $US110.

Surging Asian demand for WTI is reflected in the cost of ferrying it from America’s Gulf Coast to China. This has nearly doubled in the past week, in part because one in ten of the world’s tankers (excluding those under sanctions) is trapped in the Persian Gulf.

Despite having an enviable 1.3 billion barrels of crude in reserves, enough to cover a year of lost Gulf imports, Chinese authorities have ordered big domestic refiners to suspend exports of diesel and petrol. Less well endowed Asian countries such as India, Singapore and South Korea, with 50 days or less in stock, may follow suit.

Many refineries there are reducing output by 10 per cent or more as it is, reckons Kpler, a data provider. The Mangalore MRPL refinery, which accounts for 6 per cent of India’s crude-processing capacity, has shut one unit out of three and reportedly declared force majeure on some of its exports (though it denies this). Deeper cuts seem inevitable.

Since these countries are big suppliers of finished fuel to the rest of Asia, fears of shortage are spreading. “Crack spreads” — the measure of Asian refiners’ profit margins — for diesel, petrol and jet fuel have rocketed in Singapore, a regional oil-trading hub.

Spreads for naphtha, a crucial ingredient in plastics production that Saudi Arabia once supplied in abundance, have also soared. This signals that final customers expect large price rises or shortages and are willing to pay a premium to build up their stocks. Several petrochemical firms have already declared force majeure, citing a lack of raw materials.

The alarm signals in Asia’s gas markets are even more acute. Last year LNG from the Gulf accounted for half of India’s imports, three-quarters of Bangladesh’s and virtually all of Pakistan’s. Now not a single LNG tanker has exited Hormuz since February 27. Qatar’s main LNG export facility—which normally accounts for 17 per cent of global flows—is offline after being struck by an Iranian drone. On March 6th Saad al-Kaabi, Qatar’s energy minister, told the Financial Times it could take “weeks to months” for it to resume deliveries at a normal rate even if the war ends now.

Asian buyers are not waiting to find out if he is right. Last week the profit American LNG exporters stood to pocket by sending cargoes to Asia rather than Europe hit its highest since December 2022, when the loss of Russian gas after Vladimir Putin’s invasion of Ukraine triggered a Eurasian bidding war.

Now prices for delivery to Asia in May and June are higher than for delivery to Europe, implying that Asian buyers expect the disruption to last at least until the summer. They are now bidding aggressively enough to attract Nigerian cargoes, says Qasim Afghan of Spark Commodities, another data firm.

As with oil, China has Asia’s biggest buffers; its LNG stores hold enough to last 19 weeks. Everyone else is in a panic. Asian countries hold weeks of stocks at most, says Natasha Fielding of Argus, a price-reporting agency. Bangladesh, India, Japan, South Korea and Thailand are therefore desperately trying to secure LNG on the spot market, high prices notwithstanding. A few cargoes from America have been rerouted. Asian demand for gas has pushed up freight rates. It now costs $US264,000 a day to ferry LNG from the Atlantic basin to Asia, a six-fold increase since February 27.

At $US20 per million British thermal units (mBtu) for May, the Asian spot price for gas remains well below its peak of $US70 per mBtu in 2022. But poorer Asian countries are struggling to afford it. Last week tenders issued by Bangladesh and India failed to attract a single seller. Pricey LNG will push those countries, along with Pakistan, to switch to dirtier fuels and curtail power generation and industrial output. In many places LNG is, unusually, already more expensive than fuel oil (per unit of energy), despite surging oil prices. It looks likely to get pricier still, as Europe goes after spot cargoes this summer to restock its unusually low reserves.

Prices for LNG delivered under long-term contracts — which typically cover most Asian imports — are set to soar, too. They are linked to global oil prices. That may force slightly better-off buyers, such as Thailand and Vietnam, to trim purchases. South Korea and Taiwan, more affluent but heavily reliant on Gulf supplies, face either hefty bills or rationing.

China will chug along for a while thanks to its ample stockpiles of oil and gas. But the rest of the region is likely to suffer serious economic consequences. The havoc caused by Russia’s invasion of Ukraine cost the euro zone 2.4 per cent of GDP between the third quarter of 2021 and the third quarter of 2022, according to the European Central Bank. Now a part of the world that has for decades powered global economic growth looks perilously close to running on empty.