Shihoko Goto, Asia Program Director

The surge in global oil prices following the attacks on Iran has materially weakened global growth prospects. The Organisation for Economic Co-operation and Development now estimates that disruptions linked to the closure of the Strait of Hormuz will push inflation to approximately 4 percent this year—1.2 percentage points above earlier projections—as a direct result of higher oil and gas costs. The impact has been most immediate and acute across the Indo-Pacific. Despite decades of diversification efforts since the 1970s energy crises, Asian economies have remained structurally dependent on Middle Eastern energy supplies. In 2024, nearly 80 percent of the twenty-one million barrels per day transiting the Strait of Hormuz were destined for markets across the Indo-Pacific.

Rising energy prices are already imposing broad-based costs on households and industry across the region. In response, governments have moved quickly to deploy a mix of short-term mitigation measures, including targeted financial support to households, fuel tax reductions, subsidies, and price controls. At the same time, the shock is prompting a reassessment of energy security strategies. Several countries have relaxed constraints on coal-fired generation to stabilize power supply, while momentum behind renewed investment in nuclear energy is increasing as policymakers seek more resilient baseload capacity.

The crisis is also introducing new diplomatic and economic security dynamics between advanced economies and the Global South. India is the world’s second-largest importer of liquified petroleum gas, with roughly 60 percent of its supply transiting the Strait of Hormuz, and it has called on major economies to release strategic petroleum reserves into global markets. While such requests may appear to run counter to the interests of energy-importing states in East Asia, the broader systemic risks are significant. A sustained downturn in India, particularly in energy-intensive sectors such as steel and chemicals, would have cascading effects on global supply chains and growth.

Beyond immediate price pressures, the disruption to global energy supplies will accelerate the ongoing realignment of economic partnerships as well as energy security frameworks. The intersection of geopolitical risk and energy dependence is reinforcing the strategic importance of supply diversification, coordinated reserve management, and deeper energy cooperation across regions and will reshape the economic architecture of the Indo-Pacific. 

Troy Stangarone

Few advanced economies rely on the Middle East as heavily as South Korea. The US-Israel war with Iran has only highlighted that vulnerability. Before the conflict, 62 percent of South Korea’s crude petroleum and 20 percent of its liquified natural gas (LNG) transited the Strait of Hormuz. That exposure has been reflected in markets: the Korean won and the benchmark Korea Composite Stock Price Index (KOSPI) have both fallen, and early estimates suggest that a three-month disruption could shave 0.3 percent off GDP and raise industrial production costs by 11.8 percent. If the conflict continues the remainder of the year, growth could fall to zero.

The shock is not simply a matter of higher fuel prices. South Korea’s industrial economy relies heavily on petroleum-based feedstocks, and while the war has disrupted the flow of a fifth of the world’s crude oil and LNG, it has also disrupted these critical inputs. The longer the war persists, the greater the risk shifts from short-term volatility and temporary shortages to long-term damage to regional energy infrastructure that South Korea depends on to sustain its petrochemical and manufacturing base.

Seoul has long recognized these geopolitical risks and has developed substantial strategic reserves—208 days of petroleum and 52 days of LNG. These reserves can offset short-term supply disruptions, but they cannot shield Korea’s industrial base from the broader shock, especially the petrochemical industry. 

South Korea’s petrochemical industry is one of the world’s largest, accounting for 5.4 percent of global exports by value. Non-energy uses, such as petrochemical feedstocks, are also the largest source of consumption for crude oil in South Korea.

The petrochemical industry is particularly exposed, and disruptions to it feed into the larger industrial economy. More than 75 percent of its naphtha comes from the Middle East, and shortages have already resulted in plant closures. Naphtha is used as a feedstock to produce ethylene for a variety of industrial uses including lightweight and durable materials for car doors and seats, high-performance rubbers, to cut steel plates for shipbuilding, and to produce medical-grade plastics. It is even used to produce common items such as plastic bags, with supply already under pressure. 

Seoul has responded cautiously to US requests to support maritime escorts through the Strait of Hormuz, focusing instead on stabilizing supply chains and diversifying imports. For the first time in three decades, it instituted fuel price caps, limited exports of gasoline, kerosene, and diesel to their 2025 monthly average, and instituted a ban on exports of naphtha. South Korea has also removed the operation limits on coal plants and raised the limits on nuclear power from 70 percent to over 80 percent. Additionally, it has tapped into its strong ties with the United Arab Emirates to secure priority for oil exports from the Emirates and a pledge of an additional twenty-four million barrels of crude, while also receiving clearance for non-US dollar payments for imports of Russian oil and naphtha.

In the long term, South Korea aims to reduce its dependence on Middle Eastern petroleum. Doing so will be difficult as long as petrochemicals remain a critical part of South Korea’s industrial structure. Expanding electric vehicle adoption could significantly reduce domestic gasoline demand, but it would not eliminate the need for petroleum-based industrial feedstocks.

Ultimately, the Iran war has revealed a strategic dilemma: South Korea’s economic model depends on access to affordable petrochemicals, but its energy security depends on reducing exposure to Middle Eastern supply routes. Navigating this tension will require not only diversification of energy sources but also a broader reassessment of industrial strategy. The crisis is a reminder that South Korea’s vulnerabilities extend beyond oil prices—they reach into the core of its manufacturing economy.

James Brady

With roughly 95 percent of its oil and 11 percent of its liquified natural gas sourced from the region, Japan is particularly vulnerable to developments in the Persian Gulf. Much of its energy from the Middle East transits through the Strait of Hormuz, and while its total strategic oil reserves of around 254 days provide a sizeable buffer, the shutoff has already fed through to financial markets, with yen weakness, rising bond yields, and inflation pressures reflecting higher import costs. The Takaichi government has responded with reserve releases, fuel subsidies, corporate guidance on supply coordination to stabilize conditions, and enhanced communications and data transparency from the energy agency.

In the near term, the greater risk lies in industrial feedstocks rather than retail fuel availability. Japan sources about half of its naphtha from the Gulf and holds only around three weeks of supply. Petrochemical producers are already cutting operating rates, with implications for downstream manufacturing and longer-term capacity trajectories. While fuel subsidies will help cushion households, if the crisis persists, the government will have to find countermeasures that are both fiscally sustainable and policy-compatible with Japan’s 2050 decarbonization commitments.

As in the previous oil crises, the current shock is driving a reassessment of Japan’s energy security model. Strategic reserves provide a temporary buffer but not a structural solution, while naphtha shortages expose broader vulnerabilities across modern industrial supply chains. These pressures are set to drive a greater emphasis on physical supply resilience over price stability. 

Reorienting Japan’s energy policy will not be easy. Technical barriers remain significant, notably the petrochemical sector’s optimization for Middle Eastern crude, which is difficult to substitute. Renewable expansion is also constrained, as generation capacity in remote areas often exceeds available transmission line capacity to major demand centers. While offline nuclear capacity could in theory be brought back online, high regulatory and political hurdles after 2011 make rapid restarts difficult. 

Still, Japan has begun taking steps to boost domestic resilience and diversify supply. The government is moving to ease operating restrictions on older coal-fired power plants in the current fiscal year. The private sector is also adjusting, with energy and trading firms potentially able to redirect part of their international spot market oil and gas sales toward domestic use. Efforts to diversify naphtha sourcing are underway, but international competition and limited availability constrain substitution.

Over the longer term, Japan is seeking to diversify oil supply sources, including North America, Central Asia, and South America. The March Trump-Takaichi summit underscored this shift, with commitments to deepen US-Japan energy cooperation, including potential stockpiling of US crude and interest in Alaskan oil. Renewables may play a larger role, but expansion will require significant investment in generation and transmission infrastructure. Japan is also investing in next-generation nuclear power, though new capacity is unlikely to come online until the 2030s.

One advantage Japan brings to its energy reorientation is its diplomatic positioning. Alongside its alliance with the United States, Japan maintains stable relations with key Middle Eastern actors, including Iran, Israel, Saudi Arabia, and the United Arab Emirates. Combined with Article 9 constraints on the deployment of its Self-Defense Forces, this allows Tokyo to position itself as a credible, non-confrontational actor focused on preserving stability and maintaining energy flows. In recent weeks, Japan has engaged in high-level diplomacy with the United States, Iran, Gulf partners, and the International Energy Agency as it calibrates its response.

Even here, though, Japan’s role as a bridge-builder faces constraints. Japan’s strict conditionality for collective self-defense allowed Takaichi to resist US requests for naval support for the current operations, but Tokyo is likely to be called upon to play a role in post-ceasefire scenarios, such as deploying its advanced minesweeping capabilities in the Strait of Hormuz. 

Image: Korea Western Power