There are two solutions to inflation: supply and time.
For the economies of Asia, time is running short as they try to nurse their dwindling supplies of oil and gas.
With imports from the Persian Gulf effectively choked off, Asian economies are being forced to tap their strategic petroleum reserves as they scramble to find other sources of imported oil.
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Those accustomed to the allocation of scarce resources being driven by relative changes in price are about to witness a period of rationing across the most dynamic region in the global economy.
Already, Sri Lanka has started formal fuel rationing, while other nations like Thailand and the Philippines are ordering four-day work weeks, or are encouraging working from home.
This shock—the largest supply disruption in the history of the global oil market—will drag global growth this year to 2% or below, which is consistent with a global recession.
The price paid by the Asian economies will become more visible in the next two weeks.
The International Energy Agency estimates that 15 million barrels of crude oil and 5 million barrels of oil products typically traversed the Strait of Hormuz each day, equivalent to around 20% of global oil consumption. Nearly 90% of that crude is bound for Asian countries.
How long an individual economy can do without these imports will depend on how long their strategic reserves last and how soon other OPEC sources can ramp up exports.
IEA members
For example, Japan and South Korea have stocks of oil equal to over 200 days of imports as reported to the IEA. Australia has 49 days of reserves for a war now entering its fifth week. IEA members in Europe could withstand roughly 18 weeks of no oil imports.
Non-IEA members
China is reported to have stockpiled nearly 30 weeks of oil and can shift to coal for generating electricity. Singapore has 35 days of oil imports in reserve. Vietnam has nine weeks stockpiled while India is reported to have a three-week reserve of imported oil. For India’s households, the most important fuel is the natural gas universally used for cooking.
The takeaway
U.S. allies and trading partners are within weeks of experiencing shortages of imported petroleum products.
While the North American economy is relatively energy self-sufficient, the repercussions from an energy shock are global.
Rationing will be the baseline method of energy resource allocation across the dynamic Asian economies.
That move will affect aggregate demand and will drag down overall global growth to 2% or below this year as inflation rises to well above 4%, all of which is consistent with a global recession.
The next question is how long before that occurs in Europe, the U.K and the United States.
The answer lies in how long the conflict in the Middle East lasts.
