Asia Pacific: From Skies to Supply Chains – Asia’s Exposure to Refined Fuel Shocks

Beyond the direct impact of the closure of the Strait of Hormuz on crude supply, Asian refiners in China, South Korea, and Thailand are conserving inventories by imposing explicit export limits, while those in Japan and India show similar reluctance to sell abroad. With restrictions on the fuels that power planes, ships, and road vehicles, the energy crisis in Asia has expanded from the unavailability of crude to refining capacity and product distribution – refined fuels have emerged as the most acute near-term bottleneck for regional supply chains. These disruptions will likely outlast any immediate de-escalation of the conflict as refinery adjustments, precautionary stockpiling, and trade frictions take time to normalise.

Aviation capacity risks will weigh on tourism-dependent economies

The nature of aviation risk varies across Asia. Higher oil prices typically dampen travel demand through higher airfares, but refined aviation fuel shortages could limit capacity even where demand is still resilient.

The Philippines and Thailand appear most exposed to a jet fuel-triggered aviation downturn given the importance of international arrivals to GDP and employment (Chart 1). The Philippines has flagged potential flight groundings, and airlines in Vietnam, Malaysia, and Indonesia have cut flights as fuel stocks dwindle. Flight capacity might be rationalised due to fuel constraints. Although long-haul routes are more fuel-intensive, airlines appear to be prioritising these routes given their higher yields, greater contribution to network connectivity, and importance for maintaining market share. Instead, short-haul and domestic routes, where demand is more price-sensitive and substitution options are greater, have been cut first. However, if fuel constraints persist, even long-haul capacity could eventually come under pressure, particularly for leisure-heavy routes linking Southeast Asia to Europe and the US. Given the labour-intensive nature of tourism supply chains, these constraints could rapidly spill over into broader services activity, such as accommodation, retail, and domestic transport.

Regional aviation hubs including Singapore, Hong Kong, Japan, and South Korea are less dependent on inbound tourism demand itself but are vital regional gateways. Admittedly, national carriers such as Cathay and Singapore airlines have gained market share on Europe-bound routes. But broader cuts to the frequency of long-haul flights will lower passenger throughput and associated services activity even if regional tourism demand remains relatively stable. Weaker real incomes and heightened uncertainty around travel disruptions may further weigh on tourism demand. What’s more, a sustained reduction in passenger flights will also probably affect air cargo capacity, as bellyhold freight is vital for regional logistics networks.

Even if the conflict ends, aviation capacity will take time to normalise as airlines adjust flight schedules and fuel sourcing to manage supply risks. Booking cycles and advance travel planning are likely to further delay a recovery in realised arrivals data. Higher travel costs may also encourage substitution towards shorter-haul destinations, suggesting uneven recovery dynamics across tourism-dependent economies.

Logistics disruptions are likely to reinforce inflationary pressures

Simultaneous constraints on the availability of marine and aviation fuel are tightening regional transport capacity across sea and air freight networks. Although ships handle the bulk of regional trade, air cargo is the backbone for high-value sectors like semiconductors and electronic components, as well as perishables. When these transport modes face delays or rising costs, businesses see an immediate increase in their input expenses. For firms operating with thin margins and tight schedules, even minor logistics frictions can ripple through the production process, forcing them to raise prices to protect their bottom lines.

Freight costs aren’t the sole driver of core inflation but tend to amplify broader cost pressures, particularly during periods of supply chain disruption (Chart 2). Although transport costs are often a small part of a finished product’s price, a sudden shortage of parts can cause costs to spike when businesses cannot easily find substitutes. Economies reliant on imported intermediate goods, such as Taiwan, South Korea, Vietnam, and Malaysia, are most at risk of seeing these rising factory costs passed on to both domestic and global consumers. Past disruptions in 2021-2022 showed that logistics frictions can keep inflation higher for longer, even after the initial shock to energy prices has begun to fade.Meanwhile, the weaker relationship in 2024 (Chart 2) probably reflects offsetting disinflationary forces, including softer demand and easing input costs.

Feedstock constraints could weigh on manufacturing supply chains

Refined products such as naphtha are key inputs into plastics, packaging materials, synthetic textiles, and chemical intermediates used across a wide range of manufacturing processes. Less availability of petrochemical feedstocks could constrain production across Asia’s industrial sector, particularly in economies integrated into regional manufacturing supply chains. These materials are critical upstream inputs for electronics, automotive components, and consumer goods. Disruption at the chemical stage can spread quickly into downstream manufacturing activity.

Petrochemicals-linked sectors account for a meaningful share of manufacturing value-added (MVA) across several Asian economies when upstream and downstream linkages are considered, although the nature of exposure differs by industrial structure (Chart 3). In advanced manufacturing hubs like South Korea, Japan, and Taiwan, the direct MVA share of midstream petrochemicals often appears modest due to structurally compressed margins. However, these sectors function as critical industrial linchpins since they produce specialised resins and polymers that are difficult to substitute in higher value-added electronics and automotive production. Even marginal supply disruptions at the chemical level can generate disproportionately large downstream bottlenecks.

In contrast, emerging assembly hubs like Vietnam and the Philippines are more exposed through downstream assembly (Chart 3). Limited domestic upstream refining or cracking capacity generally increases reliance on imported intermediates, although the degree of vulnerability also depends on the scale of downstream manufacturing demand and availability of domestic alternatives. In economies such as Vietnam and the Philippines, where downstream assembly is relatively large, this can increase exposure to margin compression and export competitiveness pressures if regional feedstock supply tightens.

Regional refining hubs may see some offset from improved margins as refined product supply tightens. Singapore’s integrated refining and petrochemical complex remains a key supplier of jet fuel, marine fuel, and feedstocks within Asia, while Thailand and Malaysia benefit from relatively integrated refining-chemical value chains. Higher utilisation rates could partially cushion regional headwinds via increased intra-Asia trade in refined products.

However, stronger refining margins are unlikely to fully offset the drag from weaker downstream manufacturing if feedstock shortages constrain production. Adjustment across petrochemical supply chains typically occurs gradually, suggesting even temporary disruptions could weigh on industrial cycles and widen the divergence between upstream-integrated producers and downstream-dependent assemblers.

External balances and inflation dynamics could complicate policy responses

Higher refined fuel import costs will widen trade deficits across Asia (Chart 4). A sustained increase in fuel import bills weakens terms of trade and places downward pressure on regional currencies, particularly where energy imports represent a sizeable share of total goods imports. Currency depreciation will reinforce imported inflation pressures via higher domestic prices for fuel, transport, and imported consumer goods, increasing the risk of second-round effects on core inflation.

Singapore is unique in the region as a major refining and trading hub (Chart 4). Although higher fuel prices raise domestic costs, stronger refining margins partially cushion the impact on its external balance, provided crude supply remains available to support the export of higher-value petroleum products. Furthermore, Singapore’s monetary policy operates through the exchange rate rather than interest rates. This allows the Monetary Authority of Singapore (MAS) to counter imported inflation by adjusting the S$NEER policy band. Given that the MAS prioritises the persistence of shocks, any policy shift would likely focus on stabilising the currency’s purchasing power rather than signalling a prolonged tightening cycle. This was reflected in the MAS’s recent focus on currency strength to anchor imported costs amid volatile energy markets.

Across the region, monetary policy is set to lean modestly tighter in response to currency weakness and higher imported inflation. But any tightening is unlikely to mark the start of a sustained hiking cycle; monetary policy tools are generally limited in their ability to directly offset supply-driven increases in energy and logistics costs. Aggressive tightening risks dampening increasingly fragile domestic demand without materially reducing persistent inflation. Central banks are therefore more likely to prioritise preventing inflation expectations from becoming unanchored and limit excessive currency volatility. As such, the policy response could occur in one or two precautionary tightening moves rather than a prolonged hiking cycle.

Given the supply-driven nature of the shock, fiscal policy is likely to play a larger role in cushioning the impact through targeted subsidies, tax adjustments, and transfers. This reflects the limited effectiveness of monetary policy in addressing energy and logistics constraints, suggesting the policy mix may tilt toward fiscal support alongside measured and temporary monetary tightening.