The US$100 oil domino: How the Iran War is reshaping Asia, Malaysia and the global economic order

KUALA LUMPUR 17 Mar - When oil prices surged past the US$100 per barrel mark following the Iran war, alarm bells rang far beyond energy trading floors.

Finance ministries, central banks and corporate boardrooms across the Asia-Pacific are now confronting the implications of what could become the next global economic shock.

For Malaysia — at once an oil producer, a trading nation and a heavily subsidised economy — the consequences are uniquely double-edged.

Dr Shahreen Madros, Adjunct Professor at the UKM Graduate School of Business, views the crisis through a macroeconomic lens shaped by years of work in energy markets, global trade and policy advisory across the region.

His assessment is blunt: this is not a temporary spike. It may be the opening phase of a deeper reset in the global economic order.

NOT A SPIKE — A NEW INFLATION CYCLE

The first test will be for central banks already preparing for interest rate cuts after two years of aggressive tightening.

"This is no longer a short-term geopolitical spike," Dr Shahreen warns. "Sustained oil above US$100 is fundamentally inflationary."

Central banks across the United States, Europe and Asia now face a painful dilemma: cut rates to support slowing growth or hold them high to prevent a second wave of inflation.

"Many will be paralysed," he says. "And that paralysis itself becomes a risk to financial markets."

The transmission mechanism goes far beyond petrol prices. Freight costs, airline tickets, food production and consumer goods all carry energy inputs, allowing inflation to ripple across the entire economy.

"There will be a price point where the cost outweighs the benefit of higher oil, even for an oil-producing nation — and Malaysia may already be close to that threshold."

THE STRAIT OF HORMUZ: THE WORLD'S MOST DANGEROUS CHOKEPOINT

Roughly one-fifth of global oil supply passes through the Strait of Hormuz, making it one of the most critical chokepoints in the world economy.

Any disruption to tanker traffic would trigger immediate shockwaves in global energy markets.

"A US$120 to US$150 per barrel scenario is entirely plausible if the conflict escalates to the point where tanker passage is threatened," Dr Shahreen told DagangNews.

"The world has experienced similar shocks before — in 1973, 1979 and 1990. But today's global economy is far more interconnected and far more indebted. Our ability to absorb shocks is weaker."

Even without a physical disruption, risk is already being priced in. Insurance premiums for vessels crossing the Gulf are rising sharply, increasing the cost of every barrel leaving the region.

THE DOMINO SEQUENCE: WHO GETS HIT FIRST

Oil shocks rarely strike the economy evenly. Instead, the impact cascades across sectors.

Aviation takes the first hit. Jet fuel can account for up to 30 percent of airline operating costs, leaving carriers — many still recovering from the pandemic — acutely exposed.

Shipping follows as bunker fuel prices rise, pushing up the cost of global container transport.

Food prices come next. Fertilisers, agricultural machinery and cold-chain logistics all rely heavily on petroleum-based inputs.

Manufacturing supply chains then feel the pressure as energy-intensive industries from steel to petrochemicals reprice their costs.

"The cascade is not linear," Dr Shahreen explains. "It hits sectors simultaneously, but with different lag times."

"By the time consumers fully feel the impact, the damage to corporate margins, investment plans and employment may already be locked in."

THE STAGFLATION SPECTRE

The spectre of stagflation — the toxic combination of high inflation and stagnant growth — has returned to economic debate for the first time in decades.

Dr Shahreen sees clear parallels with the oil crises of the 1970s, though the global economy today is structurally different.

"In the 1970s, oil dependence was even more acute," he says. "Today we have alternatives such as renewables, natural gas and nuclear energy."

"But the transition is incomplete. The world still runs on oil."

If crude prices remain above US$100 for a year or more, he expects growth forecasts to be revised sharply downward while inflation remains stubbornly high.

"Corporate investment will freeze, unemployment will rise and inflation will remain elevated. That is textbook stagflation."

Emerging economies will be particularly vulnerable, especially those lacking the fiscal capacity to subsidise consumers during prolonged energy shocks.

"The world is no longer an open economy, open market, free-for-all," he says.

"A divided world forces the global economy into factions — and this war is accelerating that fracture."

ASIA IN THE CROSSHAIRS

Asia is among the most exposed regions to an oil shock.

Much of its energy supply is imported from the Gulf, while its major industrial economies — China, Japan and South Korea — remain heavily reliant on oil.

"China, Japan and Korea depend deeply on Gulf energy, and their manufacturing sectors cannot absorb sustained oil shocks without consequences," Dr Shahreen notes.

Japan and South Korea may respond by accelerating nuclear energy expansion.

"The shift toward nuclear power was already underway. A prolonged oil crisis will likely accelerate that shift significantly."

China, however, may be better prepared than many assume.

Beijing has spent years reducing its energy vulnerability, investing heavily in solar power while electrifying major parts of its industrial base.

"China has been preparing for this scenario for years," he says.

"They are not immune — but they are certainly more insulated than they were a decade ago."

Southeast Asia faces a different set of vulnerabilities.

Countries such as Malaysia, Indonesia, Thailand and Vietnam combine import dependence on food and manufactured goods with currencies vulnerable to US dollar strength.

"The deeper risk for Asia is not just higher energy costs," he cautions.

"It is demand destruction."

If the global economy slows sharply, export-dependent Asian economies could face falling orders and weaker global demand.

"The world needs buyers of goods. If much of the world is simultaneously weakened, demand falls everywhere."

MALAYSIA: WINNER OR LOSER?

The common assumption is that Malaysia benefits from rising oil prices because it exports crude.

Dr Shahreen argues that the reality is more complicated.

"Malaysia is already close to parity between oil production and domestic consumption," he explains.

"In practical terms, the country does not gain much from sustained high oil prices."

Higher revenue earned by PETRONAS can quickly be offset by rising energy generation costs and higher transport expenses across the economy.

Fuel subsidies complicate matters further.

Malaysia's subsidy system means that every ringgit gained from higher oil exports is partially offset by the fiscal cost of shielding consumers from higher pump prices.

"There is a point where the costs outweigh the benefits of higher oil — even for an oil-producing country."

"And Malaysia may already be near that point."

The greater threat, he says, lies elsewhere: a slowdown in the global economy.

Malaysia's export-driven economy depends heavily on international trade, foreign investment and tourism.

"A slowdown in global growth will eventually feed back into Malaysia," he says.

"There will be a time lag — but it will come."

A NEW WORLD ORDER

Beyond energy markets, Dr Shahreen believes the war could accelerate a broader geopolitical shift.

"If the conflict drags on, we may enter a structural phase where oil above US$100 becomes normal rather than exceptional," he says.

"But the deeper consequence may be the erosion of the global economic order that has existed since 1945."

He points to the expanding influence of BRICS economies, closer strategic alignment between China and India, and the gradual weakening of US-European economic dominance.

"What is clear is that the world will no longer function as a single open market," he says.

"A divided world will force the global economy into competing blocs."

"BRICS will expand its influence. US-European hegemony will no longer be sustainable. And a new global order will emerge."

He pauses before offering one final observation.

"I believe that is the real underlying force behind the war madness we are witnessing today." - DagangNews.com