Can Southeast Asia survive more Iran war fuel shocks?

Southeast Asia’s governments have spent months trying to blunt the effects of war-driven energy shocks from the Middle East, but renewed fighting between the United States and Iran has exposed how limited those defences are, analysts have warned. The latest flare-up has revived fears of a second round of fuel disruption across the region, where many economies remain heavily dependent on imported oil and shipping routes linked to the Gulf. Southeast Asian leaders expressed “grave concern” over the revival of tensions between the US and Iran, urging a “complete and immediate cessation of hostilities across all fronts in the Middle East” at the 59th Asean Foreign Ministers Meeting in Manila on Tuesday. The diplomats from the 11-member Association of Southeast Asian Nations also called “for the restoration of the safe, unimpeded, and continuous transit passage of vessels and aircraft in the Strait of Hormuz”. The foreign ministers said the hostilities would negatively affect “regional trade, energy and food security, including energy markets and supply chains, agricultural production, and the stability of agricultural input supply chains, particularly fertilisers”. The shaky truce between the US and Iran, formalised in June, ended this month after both sides traded accusations of ceasefire violations. Southeast Asia bore the brunt of the energy crisis that followed the outbreak of hostilities in late February and the closure of the Strait of Hormuz, where about 60 per cent of Asia’s crude oil imports come from. Countries such as the Philippines were particularly hard-hit, with the nation importing more than 95 per cent of its fuel. Analysts said the ceasefire breakdown revealed underlying weaknesses in the region’s ability to shield itself from external fuel shocks. Southeast Asian economies remained heavily dependent on imported oil and shipping routes connected to the Gulf, said Joanne Lin, a senior fellow at the ISEAS – Yusof Ishak Institute and a visiting scholar at the MIT Centre for International Studies. Higher energy costs also fed into fertiliser, food, transport and manufacturing, she said, meaning governments would have to keep diversifying suppliers, building reserves, providing targeted support and accelerating renewables, biofuels and regional energy connectivity. While there “has been some learning over the past months”, Lin said the region could not fully insulate itself from a prolonged conflict if the Strait of Hormuz remained disrupted. Collins Chong Yew Keat, a foreign affairs, security and strategy analyst at Universiti Malaya, told This Week in Asia that Asean “has not yet learned the deeper structural lesson of the crisis” as it still lacked an operational regional energy security system, with no collective mechanisms such as a strategic petroleum reserve or centralised procurement platform. “Asean can therefore speak collectively as it has in Manila in calling for an immediate cessation of hostilities and the restoration of safe and free passage through the Strait of Hormuz, but when actual supplies are threatened, member states largely fall back on national and bilateral solutions,” he said. Uneven response As countries are likely to rely on national measures to deal with external pressures, responses across the region will be uneven, with some economies more vulnerable than others. Hunter Marston, director of the Southeast Asia programme at the Lowy Institute in Sydney, said the measures implemented so far were short-term, with a “mix of optimism from countries like Indonesia” but greater volatility for others such as the Philippines given current fuel prices. “Different member states face different vulnerabilities because of their varying levels of dependence on crude oil and natural gas imports,” said Jaideep Singh, an analyst at the Institute of Strategic and International Studies in Malaysia. Singh noted that some Asean member states had already taken individual measures to ease dependency on Gulf-sourced fuel. Malaysia and Indonesia, both palm oil exporters, have expanded the use of palm-based biodiesel to reduce reliance on conventional diesel, while other countries have promoted alternative energy sources, particularly for electric vehicles. Singapore was accelerating electric vehicle adoption through strong policy support and nationwide charging infrastructure, while Laos was expanding EV uptake through electrification targets and cross-border clean energy cooperation, said Dinita Setyawati, a senior analyst for Asia at energy think tank Ember. Lin pointed out that some countries might be better equipped to handle disruptions: Brunei and Malaysia enjoyed a greater natural cushion as hydrocarbon producers and exporters, while Singapore had higher adaptive capacity through its trading and refining networks and commercial relationships. Indonesia sat somewhere in between, she added, as it was also a net petroleum importer in addition to having coal, gas and a major biofuel industry, which could entail large subsidy costs. “Thailand and the Philippines remain among the more exposed larger economies because of their dependence on imported oil and the importance of fuel to transport and electricity,” Lin said, while Cambodia, Laos, East Timor and Myanmar consumed less energy in absolute terms but had weaker fiscal space and lower household incomes, making price increases harder to absorb. Singh said Thailand’s substantial stockpiles might cushion the blow and provide some relief. Vietnam remained vulnerable as it imported 88 per cent of its oil despite having domestic refining capabilities, and “will need to diversify suppliers and long-term supply contracts rather than relying mainly on emergency spot purchases”, Chong said. Diversifying ties If the first response to the crisis is domestic cushioning, the longer-term response is likely to be a wider search for suppliers and partners that analysts say may not necessarily amount to a “wholesale geopolitical realignment”. “We might see more diversification rather than any wholesale geopolitical realignment,” Lin said, adding that Asean could deepen energy ties with Russia, Gulf producers, the US, India, Japan and Australia, depending on who could provide reliable oil, liquefied natural gas, financing and emergency support. For Marston, “the nature of hedging has already changed” as middle powers in Asean are looking more to one another, as well as partners such as Japan and Australia, to diversify their supply chains. While the US remained a significant player because of its large oil and gas exports, Marston said China was likely still the most important partner because of the enormity of its strategic reserves. Southeast Asia might also continue to warm up to Russia as it built up its reserves and improved its resilience in energy security, “but sanctions, insurance and payment risks will limit how far that relationship can expand”, Lin said. Despite these attempts, however, Asean would not necessarily become more united, Chong said, noting there would be “greater diversification without genuine regional pooling”. Unless the crisis produced a binding oil-sharing protocol, common strategic reserves and agreed emergency-allocation rules, Chong said, “Asean’s collective energy security will remain more symbolic and declaratory than operational and functional”.