Oil and beyond oil: What might be the economic implications of Iran’s war on Asia?

After Venezuela, the US and Israel have started a military attack on Iran. While the impact on Asia depends heavily on the war duration, we aim to analyze the potential economic implications using two scenarios: a quick war and a protracted war.While acknowledging the upside risk of oil prices reaching $100 per barrel or more, our baseline scenario remains at $80/b in the short run as we believe that Iran’s capacity to consistently disrupt the regional oil flows is limited. China has a 13% exposure to Iranian oil, but its massive stockpiling should provide some buffer alongside Russian supply. Meanwhile, Japan and South Korea could face more pressure as over 60% of their oil imports are transported via the Strait of Hormuz.Still, the economic impact on Asia goes beyond oil, with consequences for mobility, construction, finance, and defense. A prolonged conflict can turn temporary re-routing, delays and freight rate surges into permanent conditions, leading to higher import costs and inflation. Rising energy prices can hurt airlines' profit margins. It will make Asia-Europe flights more expensive and reduce affluent Middle Eastern tourist spending in Asia.Beyond the direct trade links, Asia sees exposure in construction. To diversify away from energy, the Middle East has been actively developing infrastructure. The region forms 36% of China’s overseas construction projects in 2025. South Korea also sees an exposure to the Middle East of 35% in 2021-25.For finance, the immediate observation is capital flowing to safe havens, including gold. Beyond market reaction, Asia-based banks have been expanding their loan portfolios to the Middle East, meaning prolonged conflict can worsen asset quality. Lastly, the most certain part is defense will see higher demand as countries will structurally increase their military spending due to the concerns about security and the push by the US. Therefore, the duration of the war remains the biggest unknown in the equation. If the war drags longer, we expect greater impact on the aforementioned sectors.