Southeast Asia’s energy squeeze

The war in Iran has delivered a systemic shock to global energy markets, but few regions have felt the strain as acutely, or quite as quickly, as Southeast Asia. With the region being highly exposed to Middle Eastern supply routes and structurally dependent on imported hydrocarbons to supply power and fuel cars and trucks, Southeast Asia now finds itself grappling with a volatile mix of LNG shortages, oil supply disruptions and subsequent rising fuel prices. The result is a policy scramble across regional capitals that blends short-term crisis management with longer-term efforts at recalibration of energy policy.

At the heart of the disruption lies the effective closure of the Strait of Hormuz, through which roughly 20% of global oil and a significant share of the planet’s LNG flows – notwithstanding recent deals by a number of regional governments with the Iranian regime to permit limited numbers of vessels through the Strait.

For Asia, the dependency on the Strait is so pronounced that a full 84% of crude oil and 83% of LNG transiting the Strait in 2024 was bound for the region. The consequences of this chokepoint disruption have been immediate – and far reaching. Brent crude has surged to around $110 per barrel at times, well above the $70–85 range that prevailed through much of the past two years, and should Tehran refuse to abide by the conditions laid down in a Trump White House effort at peace talks by 8pm EDT on March 7, the $110 number could be left behind as prices rise again.

For Southeast Asia, thousands of miles east of the Strait, the shock is amplified by structural vulnerability. While countries such as Malaysia and Indonesia are themselves producers of LNG at least, and a limited amount of oil, the region as a whole has become increasingly import-dependent as domestic reserves decline and demand rises. This imbalance has translated into acute exposure to both price volatility and physical shortages.

Nowhere is this more evident than in the region’s LNG markets – just at a time Asia was moving closer to the once-widespread belief that LNG is the ideal transitional fuel as the world moves to a future goal of all-out renewables use.

Asian LNG prices have surged by around 85% since the onset of the conflict, at one stage exceeding even the peaks seen during the 2022 global energy crisis. In some cases, the increase has been even more dramatic with broader estimates suggesting that spot LNG prices in Asia have risen by more than 140% in places following disruptions to Qatari supply.

The knock-on effects are being felt across Southeast Asian economies. Governments from Thailand to the Philippines have introduced wide ranging conservation measures such as remote work policies, reduced operating hours and in some cases, fuel rationing. In the Philippines, oil reserves have fallen to roughly 45 days of supply according to local reports, while hundreds of petrol stations have shut amid tightening availability. Airlines across Asia have cut routes, and industrial users are curbing output as rising diesel and jet fuel costs cut into profits.

The surge in global oil benchmarks has already filtered into domestic fuel markets, pushing up the cost of gasoline and diesel in most countries across the region. In import-dependent economies, this has then translated into broader inflationary pressures, particularly in the transportation and food sectors with fertiliser costs which are linked to both natural gas and oil, also increasing. This in turn is threatening agricultural output in high population countries such as Vietnam and Indonesia.

Faced with these pressures, most Southeast Asian governments have adopted a three-pronged response of diversification coupled to substitution and intervention.

Diversification has been the most immediate lever, with Middle Eastern supplies constrained as Southeast Asian countries have en-masse turned to alternative sources, notably the Atlantic Basin. Imports of Brazilian fuel oil more than doubled to over 1mn tonnes in March which is helping to ease some shortages in trading and bunkering hubs such as Singapore and Malaysia. Indonesia too has sought to diversify crude imports, reaching out to Africa and the US.

Substitution, however, has been more controversial. In looking for readily available power sources as the warmer summer months approach, a number of Asian economies, including several in Southeast Asia, as well as those in Northeast and South Asia, have switched back to coal-fired generation to help offset LNG shortages. While effective in the short term, this shift risks undermining long-standing climate commitments. Crucially, it also reflects the limited flexibility of energy systems that have for so long been working to go green but still remain heavily dependent on imported fuels.

Intervention meanwhile, has taken the form of subsidies and price caps, with governments attempting to shield consumers from the full impact of rising gasoline and diesel prices. In some countries though, fiscal constraints are already seen as limiting the sustainability of such measures.

The scale of the disruption on global power supply, described by the International Energy Agency in recent days as the most severe energy problem in history, means that even aggressive policy responses can only partially offset the shock, however. As a result, industrial activity in the region and elsewhere around the world is already being curtailed. Financial markets have reacted sharply, with regional equities shedding billions in value and yo-yoing each time Donald Trump makes a speech or looks to be approaching a deal under which the fighting will cease and the Strait will reopen.

To this end, the broader economic implications are significant. Analysts have already estimated that the energy shock could shave up to 1.3% off growth in developing Asia.

Yet the crisis may also prove catalytic as the disruption has exposed the risks of over-reliance on a single geographic supply corridor and is likely to accelerate efforts to diversify energy sources regardless of when the war ends.

Investment in renewables will rise as regional power grids and domestic energy infrastructure investment gains momentum. But this all takes time.

For now, Southeast Asia remains in reactive mode. The combination of LNG and oil shortages coupled to rising gasoline and diesel prices is testing both economic resilience and policy flexibility everywhere. If and when Southeast Asia emerges more secure power-wise depends on how quickly it can shift the current power crisis into adaptation then longer-lasting change.