Thursday’s attacks on two oil tankers in the Gulf of Oman near the Strait of Hormuz highlight the risks of a third oil shock.
The first two such shocks took place in the 1970s, causing gasoline prices to balloon and certain commodities to run short, hurting the economies of oil importers. These days, the risks are higher: Crude from the Middle East supports the entire supply chain of Asian manufacturers. If the lifeline to the “world’s workshop” is cut, the disruption would likely spread to Western financial markets, triggering a global crisis.
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Asia’s manufacturing network, with China at its hub, has become an industrial powerhouse that no other region can replace. But the network is powered by oil and natural gas from the Middle East, one of the most politically volatile areas in the world.
The fragility of the Asian industrial network became more apparent as the U.S. has become more self-sufficient and isolationist. Washington has scaled back its strategic commitment to Middle East, as the shale revolution brought about by fracking and horizontal drilling has allowed it to increase domestic production of oil and gas. It may also be less interested in protecting international sea lanes and ensuring stability in the Middle East.
Japan carries the scars of the two earlier oil shocks, and considers the loss of its oil supply a major risk to its economy. Although that risk is real, there are others with even bigger implications.
Just as the flooding in Thailand in 2011 disrupted Japanese manufacturers’ supply chains, hidden risks lurk in the current tense environment. If a factory in Southeast Asia has its power cut off, shutting down production, for example, product designers and marketers in South Korea or Japan will also take a hit. Asia’s sprawling industrial network was created this century, but has not yet been stress-tested by a big oil shock.
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The lack of press freedom in the Middle East is another big problem. Separating news from rumor takes time in an uncertain and rapidly changing political landscape. In such circumstances, financial markets are apt to act based on worst-case scenarios.