The Iran War’s Lasting Scars Across Asia

An interim deal to reopen the Strait of Hormuz offers relief, but Asia’s economic woes are far from over. Beyond the chokepoint, the conflict has forced long-lasting shifts in Asia’s food and energy flows. On today’s Big Take Asia podcast, Oanh Ha joins Odd Lots co-hosts Tracy Alloway and Joe Weisenthal to discuss why Asia is reeling from the conflict and what the “new normal” looks like for global supply chains. Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Tracy Alloway?

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• 1:52Speaker 01

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• 1:57Speaker 02

  We begin the week with the US and Iran having reached an interim deal to end hostilities and reopen the Strait of Hormuz.

• 2:03Speaker 03

  New cent oil prices lower and sparked a relief rally across Asian markets. Officials from both countries set to meet now in Switzerland on June 19, where the agreement will be formally.

• 2:13Tracy Alloway?

  Everyone has discovered from the past six years that these big one-off, supposedly one-off disruptions can happen with frequency.

• 2:25Speaker 04

  That's Bloomberg's Tracy Alockway. Tracy co-hosts the Odd Lots podcast and she spends a lot of time looking at the long-term impacts of geopolitics on the global economy.

• 2:35Tracy Alloway?

  And so the lesson that everyone's been internalizing is that you need to build up stockpiles, you need to have independence in terms of your crucial supplies, you need to have additional capacity.

• 2:47Speaker 04

  And few places have shown the need for independence and extra capacity more clearly than in Asia over the past few months. After the US and Israel went to war with Iran, the Strait of Hormuz grounded to a halt, choking off supplies of virtually every major commodity, including one-fifth of the world's oil.

• 3:07Speaker 05

  But I think a lot of great things are going to happen in the Middle East right now. Very importantly, the oil is plummeting down.

• 3:15Speaker 04

  At the G7 summit in France, President Trump touted a deal the US reached with Iran's regime over the weekend, which he says will reopen the Strait of Hormuz.

• 3:25Speaker 05

  Essentially, ships are starting to go out. Now on Friday, it'll be completely opened.

• 3:31Speaker 04

  Across Asia, countries are welcoming the US-Iran peace deal that would help to stabilize global energy prices and reopen a vital shipping route. But many are skeptical that will happen. And even if it does, for Asia, that shift might be too little, too late.

• 3:53Joe Weisenthal?

  There is this brewing, but not yet impacting, food issue that will arise in Southeast Asia specifically.

• 4:01Speaker 04

  That's Bloomberg's Joe Weisenthal. He co-hosts Odd Lots with Tracy.

• 4:05Joe Weisenthal?

  The closure of the Strait of Hormuz is going to create a food stress in much of the world during the next planting season. And if there's food stress, people will be buying food and not random manufactured goods in China come that time. And so there may be an element where China is choosing to reduce its imports so that its customers of manufacturers have more capacity come next year.

• 4:43Speaker 04

  Welcome to the Big Tech Asia from Bloomberg News. I'm Juan Ha. Today, I'm sitting down with my colleagues Tracy Alocke and Joe Weisenthal, co-hosts of Bloomberg's Odd Lots podcast. We recorded this conversation just before news broke that Iran and the US may have struck a deal to reopen the Strait of Hormuz. And as you'll hear, this discussion is arguably just as relevant now as when we taped it. While the reopening of the strait would be a welcome relief, the structural shifts caused by the conflict have fundamentally changed businesses across Asia. And the resulting pressure on food and energy supplies and prices isn't going away anytime soon.

• 5:24Speaker 04

  On today's show, we dive into why Asia is feeling more economic pain from this conflict than Western nations, and what the new normal looks like for the region and the rest of the world.

• 5:43Speaker 04

  While the details of the proposed new deal between the US and Iran remain unclear, one thing is certain: war in Iran and the virtual closure of the Strait of Hormuz have effectively slapped a war tax on vital products, and it's impacted every corner of the global economy. You've probably felt the pinch in one way or another, but its effects haven't been distributed evenly. Wealthy countries like the US and Japan have opted to drain their stockpiles of crude oil. In other corners of the world, governments are turning to demand destruction by encouraging industries and consumers to use less. But that risks slowing economic growth and triggering recession.

• 6:25Speaker 04

  It's a glaring disparity, and Bloomberg's Tracy Alockway says it highlights a structural vulnerability.

• 6:33Tracy Alloway?

  They're often poorer countries. They don't have as big stockpiles of oil inventory. And the one thing we've seen developed countries do across the world is really start to dig into those stockpiles and release barrels in order to, I guess, cushion the higher prices. And so for a poorer country, I think that's one of the reasons in Asia you're seeing the governments really focused on demand destruction rather than propping up prices. So you've had, I think, India was encouraging people not to go on flights. People are being urged not to drive to work, things like that. China is doing pretty much all the heavy lifting in terms of demand destruction,

• 7:17Tracy Alloway?

  or like the bulk of it. So I saw a JP Morgan estimate, I think, saying that demand for oil from China had fallen like 9%. I think that's 1.5 million barrels a day.

• 7:29Speaker 04

  It's huge.

• 7:29Tracy Alloway?

  Yeah, it's a pretty big deal. And again, it stands in stark contrast to a lot of the developed nations like the US that are really digging into their stockpiles.

• 7:40Speaker 04

  You know, I don't know if you guys have noticed in your time here, the prices at gas stations. Do you know how much gas in Hong Kong costs?

• 7:46Joe Weisenthal?

  No.

• 7:47Speaker 04

  About 33 Hong Kong dollars per liter, which is its equivalent of about $16 per gallon.

• 7:54Tracy Alloway?

  Wow.

• 7:54Joe Weisenthal?

  Wow.

• 7:55Speaker 04

  Right? That's up about 15% since the Iran war began. And diesel prices have actually jumped like near 50%. And I wonder, how does this stack up to what we've seen in the US? And I guess more importantly, how does that feed into inflationary pressures?

• 8:09Joe Weisenthal?

  I mean, if we had $16 gasoline in the US, there would definitely be a revolution for sure.

• 8:16Joe Weisenthal?

  Clearly, inflation is trending up in the US for a number of reasons. One of them is oil, and so you might say, well, you strip that out because that goes into headline rather than core inflation. But then, when you think about like, everything has oil or energy in it, especially because of transport costs, it just builds that upward pressure. Throw in all the data center spending, and the story is just like, building heat and pressure on everything, and oil is just part of it.

• 8:43Speaker 04

  In some countries with limited resources, governments are left with little choice but to turn the lights off. But wealthier countries are playing a very different game. Instead of asking citizens to cut back, the countries who can afford it are spending heavily to absorb the sticker shock at the pump. You know, here in Hong Kong, the government is actually putting aside the equivalent of 230 million US dollars in a subsidy program to help manage soaring fuel prices. It does seem like there's this imbalance in how the burden of the conflict is being carried, right? You've got developed economies like Hong Kong and Germany able to afford these subsidies, while you've got emerging countries who literally can't keep the lights on.

• 9:28Speaker 04

  What do you guys make of that disparity? And I guess the question is, is this something US policymakers even think about?

• 9:34Tracy Alloway?

  Probably not, to be honest. One of the interesting things here is, to me, is how long the US can actually offset the pain of higher prices. They've obviously been releasing a lot from the Strategic Petroleum Reserve. The question is, how long can you actually keep doing it? And apparently, the US is now getting pretty close to its operational minimum. So I think, I think the minimum is like 250 million barrels, and we're now at...

• 10:03Joe Weisenthal?

  349 million, yeah, is the lowest. We're back to the post-COVID lows.

• 10:08Tracy Alloway?

  Yeah, that's right. So, the issue in the US is like, crunch time could come, right?

• 10:15Speaker 04

  Exactly, they're gonna lose that buffer pretty soon. And I think Asia does seem caught in this trap that really is not of its own making, right? You've got interest rates that are rising globally, of course, driven by the war shocks and the AI investment boom centered in the US and the West. You've got the US dollar really strong right now. What do you think is impact of the US dollar strengthening on emerging Asian economies?

• 10:39Tracy Alloway?

  Not good. So... There's the outlook for economic growth and there's the outlook for the fiscal side, let's say. And so if you're spending money to subsidize oil prices and you're running through your stockpiles in some instances, then it becomes more expensive the longer it goes on. One of the theories I've seen for the falling gold price recently is that governments are selling or central banks are selling reserve assets in order to raise more foreign FX so that they can buy more oil at the higher prices. So it exacerbates foreign currency exposure for emerging markets and probably weakens their fiscal position

• 11:24Tracy Alloway?

  in the future. And then in terms of economic growth, so obviously if you can't get oil, if you can't get feedstock for plastics, that's pretty much in everything. And so you'll see less economic activity. But on the other hand, if we see some countries respond to higher oil prices by actually building out more clean energy capacity, selling more EVs, for instance, then like, that could be a little bit of an economic boost. And I'm not saying that it's enough to fully offset the impact, but like, it's something, at least.

• 12:00Joe Weisenthal?

  So like, let's get back to the context of the question. It doesn't matter what the price of the dollar is. People are going to spend a crazy amount of money on memory chips from Korea, period. The yuan could go up, the yuan could go down, it doesn't matter. We're going to be shipping a lot of dollars to Korea and Taiwan for key infrastructure for the AI build out. And so I think, yes, absolutely, like, the strength of the dollar is real. But I think we're in this very odd moment where because the AI race feels existential, that the traditional macro signals that we would look at like rates and FX are being swamped by the spending that everyone has just chosen to make for existential reasons

• 12:45Joe Weisenthal?

  on so many aspects of AI.

• 12:47Speaker 04

  Yeah. And to your point, Asia is the backbone of the global AI ecosystem. Factories here produce the chips that power the AI revolution. But those factories rely heavily on energy and raw materials, right? So what happens if there's ongoing uncertainty or disruption at the Strait of Hormuz?

• 13:06Tracy Alloway?

  Should we do helium?

• 13:07Joe Weisenthal?

  Yeah, I was gonna, yeah, go for it.

• 13:09Tracy Alloway?

  No, you start.

• 13:11Joe Weisenthal?

  Well, I was just gonna say, like, both of our minds went to helium at the same time. So it's like, this is a pretty important in advanced semiconductor manufacturing, helium. Please don't ask me exactly why, but it has to do something with like, its ability to go down to incredibly cold temperatures, which is helpful in all kinds of different ways. But there is not a lot of elasticity in helium supply. And so if there's gonna be like, one link where the persistent closure of the stratum of Hormuz might actually intersect with that, it would be if they truly run out of helium. And then you just really have a much harder time making chips.

• 13:54Speaker 04

  Now, I want to shift to interest rates for a bit. Japan's wholesale inflation accelerated in May at its fastest pace in three years. And its producer price index also surged to 6.3%. It was quite high. That puts a lot of pressure on the Bank of Japan to hike interest rates. And across Asia, you are seeing countries raising their inflation projections and pushing interest rates higher. What do you think would be the broader impact of prolonged inflation across Asia? And what does it mean for US consumers?

• 14:26Tracy Alloway?

  So, the inflationary impact is there, right? And it's not even necessarily oil. It's also those petrochemicals which go into everything. And then the other thing in terms of inflation, governments and companies around the world are learning that it's important to build up stockpiles. And it's important to build out your energy capacity, or your petrochemical capacity, or your chips capacity, things like that. If you have everyone all at once trying to do this, that consumes resources, right? That is de facto inflationary. And I think that's probably the lesson we have collectively learned from the past few

• 15:08Tracy Alloway?

  years, is that you don't want to be left high and dry if there's a big disruption. It is really important to have extra stuff. And extra stuff, you know, means higher prices.

• 15:28Speaker 04

  After the break, why we may not yet have seen the full extent of damage caused by the closure of the Strait of Hormuz, and how the fallout from the war is reshaping Asia's relationship with the rest of the world.

• 15:44Joe Weisenthal?

  There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and research get you up to speed on what matters and what to watch next, about the time it takes to grab a coffee. So, search Barclays Brief wherever you get your podcasts.

• 16:10Speaker 01

  This is the Bloomberg Tech Minute, brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk, and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices,

• 16:53Speaker 01

  but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 17:41Speaker 04

  The supply shock caused by the closure of the The Strait of Hormuz is arguably the biggest ever. But by draining reserves, finding workarounds and managing demand, governments have tried to shield their citizens from the pain, or delaying it at least. Even if the strait does open this weekend, Bloomberg's Joe Weisenthal and Tracy Alockway say that pain might still be coming. Richer countries will be able to spend to ease it, but poorer countries in Asia don't have those resources. And that could spell trouble for everyone. You guys spoke with a former farmer, Lurkin Kelly, on one of your recent episodes.

• 18:20Speaker 07

  The problem's going to arise in six months and 12 months' time when the decision's been made today about, do I plant that field of wheat? Or do I breed more cattle for next year? And farmers are going to say, no, we're not going to do that.

• 18:32Speaker 04

  You know, across Southeast Asia right now, farmers are now skipping this planting season.

• 18:37Joe Weisenthal?

  Yes.

• 18:37Speaker 04

  Right, because they can't afford the diesel for the tractors. They can't afford the diesel for the water pumps, right, that they need to cultivate the crops. And some are actually choosing to leave crops rotting in the ground because they can't afford to harvest. I mean, that's huge, right?

• 18:51Joe Weisenthal?

  This is what, so this is what I was saying earlier, that perhaps one of the shoes that may be yet to drop is a food crisis in Asia. And it's perhaps the hierarchy of needs, right? If you're struggling to buy food, you're not going to be buying electronics, right, from China, whatever it else. And so perhaps one part of the logic for China to reduce its imports is to ease a little bit of that squeeze. But what I've heard, which is that there is this brewing, but not yet impacting, food issue that will arise in Southeast Asia specifically.

• 19:26Tracy Alloway?

  When it comes to the impact of fertilizer, we're talking about longer timeframes because there are planting seasons, as you just mentioned. One historical anecdote that I learned from Adam Tu's is that apparently in ancient Roman times, emperors would try to time wars so that they weren't during the planting season. So that it wouldn't disrupt food supplies and also so that farmers could actually go off and be soldiers. But clearly, we seem to have forgotten that lesson.

• 19:54Speaker 04

  I want to stay on food for a bit. You know, in Thailand, I was there in Bangkok just a couple of weeks ago and talked to our colleagues there. They've done some really great reporting on how fishermen in Thailand are keeping their boats anchored because fuel eats up more than half of the cost of every trip. So, you know, they basically can't raise the price of their catch, right? So they're deciding not to go out. And I wonder, to what extent should policymakers and leaders worry about this, you know, turning into a political problem, right? This ag issue?

• 20:25Joe Weisenthal?

  Yeah, I mean, look, I don't know if I ever fully bought the theory, but, you know, there was, there are many people who argued, for example, that the catalyst for the Arab Spring was wheat prices that year. And, you know, our leadership has other things on their mind. We're talking about, this is very classic type of thing that creates real political disruption, and I don't think we should have the hubris to assume that these cycles, which have probably have data points going back thousands of years, have suddenly stopped.

• 20:57Speaker 04

  And I guess with sanctions, I mean, I do wonder to what extent that the oil crunch would lead to the weakening of essentially one of the US's biggest non-military weapons, right? Sanctions.

• 21:09Joe Weisenthal?

  There was an interesting article in the Wall Street Journal that the North Korean economy is doing surprisingly well. They're actually building a lot of housing, and they're sort of quite a little evidence of like improving standard of living and so forth. And of course, here is, you know, one of the most sanctioned countries on earth for a very long time. I just think like, the degree to which sanctions are a powerful tool, or that they can really be used to like crush any enemy, all of it's being called into question right now.

• 21:43Speaker 04

  Now, let's say the war ends next week. How do you think the world has fundamentally been changed because of this war and how it's played out?

• 21:52Tracy Alloway?

  So I think it goes back to, I guess, the idea of the choke point economy. So everyone has discovered from the past six years that these big one-off, supposedly one-off disruptions can happen with frequency, right? So each disruption is slightly different in what it actually is, but they're happening more often. I mean, I'm sure both of us, having been in Hong Kong during the pandemic, I will always keep an extra supply of toilet paper from now until forever, basically. We all learned that. And so I think that impulse is going to stick around for a long time.

• 22:32Joe Weisenthal?

  The world is very globalized. I feel like for me, coming here to Hong Kong, it's been a very helpful reminder like how integrated the world still is. But these are the wheels are all spinning in the opposite direction of where they were in, you know, the second half of the 20th century. Trade barriers are going up and countries don't trust each other. And that is going to have consequences for both productivity and prices.

• 23:11Speaker 04

  This is the Big Take Asia from Bloomberg News. I'm Juan Ha. To get more from the Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com/podcastoffer. If you liked the episode, make sure to subscribe and review The Big Take Asia wherever you listen to podcasts. It really helps people find the show. Thanks for listening. See you next time.

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