Reliance on Gulf oil exposes South Korea and Japan to looming energy crisis

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SEOUL – Iran’s blocking of the Strait of Hormuz is threatening an energy crisis for South Korea and Japan, both of which are industrial economies that rely heavily on the Middle East for their crude oil supply.

Neither South Korea nor Japan has significant domestic oil production, leaving them almost entirely reliant on imported crude to sustain their energy needs, even as their economies depend heavily on export-oriented manufacturing.

Japan imports about 95 per cent of its oil needs from the Gulf, while South Korea imports 70 per cent, to fuel key export industries such as semiconductors, petrochemicals and automobiles.

Oil prices have been jumping in both countries since the US and Israel launched air strikes on Iran on Feb 28.

Stock markets in South Korea and Japan plunged by more than 5 per cent on March 9, riding on fears that a prolonged war could lead to the worst oil crisis the world has seen in decades.

In South Korea, petrol prices surged by nearly 200 won (17 Singapore cents) per litre within the first week of the Iran conflict, prompting the government to impose fuel price caps for the first time in nearly 30 years.

Petrol stations in South Korea had reported a 20 per cent increase in sales as motorists rushed to top up before prices rose further.

For the first two weeks starting from March 13, wholesale prices for petrol will be capped at 1,724 won per litre, while diesel is capped at 1,713 won per litre. The changes are expected to be reflected in consumer prices after two to three days.

The cap will be recalculated every two weeks until the government assesses that domestic oil prices are stable.

Meanwhile, Japan’s fuel prices rose more modestly at 3.3 yen (three Singapore cents) per litre for the same period, buffered by the government’s subsidy policy to support oil refiners through price fluctuations.

Tehran has, since early March, closed the Strait of Hormuz, one of the world’s most critical sea lanes through which 25 per cent of all seaborne oil trade and 20 per cent of liquefied natural gas transit.

On March 12, Iran’s new Supreme Leader Mojtaba Khamenei ordered the shipping lane to remain closed.

Oil prices have surged more than 35 per cent since the conflict began, rising from about US$70 to US$72 per barrel to peak at US$119 per barrel on March 9 before settling down to around US$100 per barrel as at March 13.

To help address disruptions in oil markets and stabilise prices, South Korea and Japan have unveiled plans to release their strategic oil reserves.

On March 11, South Korea said it would release 22.46 million barrels of oil, or up to nine days of domestic demand, as part of a collective agreement among International Energy Agency (IEA) members to release a total of 400 million barrels of oil into the market.

Japan also announced on the same day a release of 80 million barrels of oil from its strategic reserves, which is equivalent to 15 days of Japan’s oil consumption needs.  

Both countries are among the 32 members of the IEA, an intergovernmental body that coordinates energy security among major industrialised economies.

South Korea’s Foreign Minister Cho Hyun, in a recent written interview with The Straits Times, said his country is closely monitoring developments in the Middle East.

“As the situation in the Middle East has implications both for the region and beyond, we are concerned about its impact on global security and economy, including energy supply chains, logistics and aviation networks,” he said.

He noted that analysts have said a prolonged closure of the Strait of Hormuz could trigger the worst global energy crisis since the oil shocks of the 1970s. 

While the two countries’ substantial oil reserves – 254 days for Japan and 207 days for South Korea – are sufficient to cushion shocks in the short term, analysts say prolonged supply chain disruptions would put strain on the economies.  

Mr Alexander Eid, an expert on the Koreas from The Asia Group, a US strategic advisory firm, told ST that the primary risk for South Korea centres on crude oil, which not only underpins transportation fuels such as petrol and diesel, but also the country’s petrochemical sector, a core pillar of South Korea’s industrial economy.

“While South Korea’s strategic reserves and fiscal interventions can cushion near-term shocks, a prolonged disruption would strain the government’s ability to absorb sustained price increases, place additional pressure on a petrochemical sector already facing heightened operational risk, and potentially lead to second order impacts across the economy,” said Mr Eid.

“Fiscal intervention and reserves can manage near-term impacts, but long-term solutions will be more challenging,” he assessed.

A report by Citibank Korea released on March 3 projected that South Korea’s gross domestic product growth could fall by up to 0.45 percentage point in 2026 if oil prices remain above an average of US$82 per barrel. The current growth forecast for 2026 by the Bank of Korea stands at 2 per cent.

Mr Kiuchi Takahide, an executive economist at Nomura Research Institute, warned that rising crude prices could pull down Japan’s real GDP by 0.18 per cent and add to inflation risk.

“If prices keep rising, the level of personal consumption cannot be sustained, and the Japanese economy could go into recession,” warned the economist, as quoted by international broadcaster NHK World.

The South Korean government has since moved to mitigate the potential economic shock.

On March 4, President Lee Jae Myung ordered the injection of a 100 trillion won financial package to stabilise capital markets. A week later, on March 12, he announced plans to prepare a supplementary budget to support economic recovery and help households weather the crisis.

Over in Japan, Prime Minister Sanae Takaichi said on March 9 that she would not overhaul the government’s draft fiscal 2026 budget currently under deliberation in the Diet, but added that her administration is considering measures to prevent petrol prices from “rising to levels intolerable for the public”.

Ms Takaichi’s remarks in Parliament come ahead of her planned visit to Washington on March 19, where the Japan-US alliance and Japan’s potential support for the US-Israel military operations against Iran are expected to be key topics during her meeting with US President Donald Trump. 

Associate Professor Kim In-wook of Sungkyunkwan University in Seoul said the greater risk for both governments lies less in a physical disruption to oil supplies than in their limited control over market sentiment.

“At some point, releasing strategic oil reserves may be interpreted by the market as a signal that the supply crisis can no longer be managed through normal channels,” said Prof Kim.

Beyond robust reserves, there is a limit to how much better a country can prepare for an oil crisis, said the political scientist.

“Oil is a highly fungible and globally traded commodity. As a result, measures such as supplier diversification, stronger bilateral ties with oil producers, or even expanding domestic production do not fully shield a country from global price fluctuations,” said Prof Kim.

He added that “it is not the physical drawdown itself that would destabilise the market, but rather the market’s collective judgment that the Strait of Hormuz is unlikely to reopen any time soon”.

“Whether triggered by crisis escalation, Iran’s deployment of sea mines, or simple cumulative fatigue, the transition from managed scarcity to uncontrollable market panic would be the primary ‘pain point’ for both governments.”