The most important lesson from the Hormuz oil shock | Number Theory

Major Asian countries had no say whatsoever in starting the war. This asymmetry is perhaps the most important lesson from the ongoing oil shock

As the war in West Asia continues, the global economy is getting as badly hit as people in the war zone. The biggest reason for this is energy shipments from the critical chokepoint of the Strait of Hormuz coming to a virtual halt because of the ongoing hostilities. To be sure, not everyone is, or more importantly, will suffer equally if the conflict is prolonged. This is because the Strait of Hormuz is a more important chokepoint for energy supplies to Asia than to North America or Europe. Major Asian countries had no say whatsoever in starting the war. This asymmetry is perhaps the most important lesson from the ongoing oil shock.

AFP file photo (AFP)

• The war would not have happened without the US agreeing to launch it

  Israel has always wanted to attack Iran. It has also been trying to persuade the US to join ranks. No US President before Donald Trump entertained the idea. Trump 1.0 killed the Iran nuclear deal and 2.0 started a full-fledged war. By all accounts, there was very little clarity of objectives or strategy in place – like is the case with all Trump decisions – in case the initially stated plan of a meltdown of Iran within the first couple of days of eliminating the top leadership did not materialize. The confusion in the US’s strategic thinking notwithstanding, its ascent to joining the war was absolutely critical for it to start in the first place.
• 
  While US’s geopolitical leadership is intact, its geoeconomics importance has been going down

  In almost all the major oil shocks before this one – in the aftermath of the Yom Kippur war in 1973, the Iranian Revolution which brought in the Islamic regime in power, and the two Gulf Wars – the US was the largest economy in the world, especially in relation to Asia. Not anymore. The combined GDP of the four largest Asian economies – China, Japan, India and South Korea – surpassed the US in the early 2010s and the trend continues. In manufacturing, which is more important from the perspective of global value chains, the gap is even larger.
• 
  US’s falling importance in economic output has been accompanied by its share in energy consumption too

  The total energy consumption of the US had started trailing that of the four Asian countries combined about a decade before its GDP fell behind. This is also now true for oil and natural gas, where the Asian countries surpassed the US in 2017. Just as with economic output, the gap in energy consumption is also growing over time. To be sure, most of this increasing gap is on account of China and India, followed by South Korea. Japan's energy consumption, including that of oil and gas in particular, has decreased since the 1990s.
• 
  US, unlike in the past oil shocks, is not an energy importer anymore

  Memories of the 1970s oil shocks in the US include people queuing at gas stations as supplies dried up. Even paying a higher price was not enough for overcome the shortage. Today, if the US wanted, it could insulate its economy and way of life from the oil charges east of the Strait of Hormuz by completely or partially banning energy exports and forcing producers to sell at a lower price in the home market. This makes its risk factor to a global oil shock significantly smaller than what it has been in previous oil shocks.
• Asia did not start the war, but must pay for it

  The supply shock due to the war has/will jeopardize everything from food production (on account of fertilizer shortage) to services (such as restaurants) in most Asian countries. The pain will vary according to the level of strategic reserves countries hold. India is perhaps the worst off among the four major Asian economies here. Ironically, three of the four major Asian powers (excluding China) see themselves as strategic allies of the US, yet they are left to fend for themselves, at this difficult juncture, even though the US is the least vulnerable to a global oil shock it has been in its history. The roots of this painful irony lie in the growing asymmetry between geopolitics and geoeconomics in today’s world.