No Safe Harbor: How Hormuz Disruptions are Reshaping Economies in Asia

In this episode of What Comes Next, Host and TAG Senior Advisor Mira Rapp-Hooper speaks with Chairman and Co-Founder Kurt Campbell about The Asia Group’s newly released report, “No Safe Harbor”. They discuss why disruptions in the Strait of Hormuz are not just an oil story, but a wider supply chain shock affecting energy, semiconductors, petrochemicals, fertilizer, healthcare, and critical industries across Asia. Mira and Kurt examine why the impacts are uneven across China, Japan, India, South Korea, and Southeast Asia; how China may emerge with strategic advantages; why the U.S.-Iran ceasefire MoU does not necessarily guarantee a return to the status quo ante; and what governments and businesses should do to build resilience in a world where critical chokepoints can no longer be assumed secure. 

You can read the full report at https://straitofhormuz.theasiagroup.com/

What Comes Next with Mira Rapp-Hooper is produced by Rivan Dwiastono, executive produced by Lauren Dueck, with editorial input from Prashant Jha. It contains music by Cody Martin via Soundstripe. 

What Comes Next is a production of The Asia Group, and is powered by TAG AI, TAG's geopolitical decision engine for businesses.

Transcript

SPEAKER_02 0:00

Countries with greater diversity, with more reserves, and frankly, with energy plans well understood and investments in areas of renewables, that you see those countries more likely to be able to withstand challenges up like the straight closure. That's one of the reasons why we basically, I think, concluded that almost undeniably one of the early winners from this has been China.

SPEAKER_00 0:35

This week, the Asia Group has published a new comprehensive report called No Safe Harbor, which examines how disruptions in the Strait of Hormoes are reshaping energy markets, supply chains, and geopolitics across the Indo-Pacific. Here at the Asia Group, co-founder and chairman Kurt Campbell has led this research effort and is here to talk to me today about the findings of this new report. Let's give a listen. Kurt Campbell, thank you so much for joining us again on What Comes Next.

SPEAKER_01 1:05

Mira, it's always my pleasure. Great to be with you. Love your podcast.

SPEAKER_00 1:09

Well, I'm really excited for this conversation this morning because here at the Asia Group, we have just uh released a really important report called No Safe Harbor, which examines how the disruptions in the Strait of Hormuz over the course of the last few months have reshaped energy markets, supply chains, and geopolitics across the Indo-Pacific. And you have really led the effort here at the Asia Group to sum in all of the capacities we have at our disposal to really produce an integrated, methodologically sophisticated and innovative document that we're gonna pour through today. So I'd love to ask you to just start by telling our audience why this report matters and what the key findings are.

SPEAKER_02 1:54

Great, Mira. Thank you. Um look, I think one of the things that we started to see relatively early on in the crisis is um that uh a number of countries in the uh Indo-Pacific, Southeast Asia, some countries in Northeast Asia were experiencing um some shortages and also uh inflation, variety of other challenges associated with the products that you've just listed that come from the Gulf. And I think that spurred us to want to do a deeper dive into how the disruptions and the closure for some period of the strait impacts the Indo-Pacific and the United States. And I think one of the things that we learned and realized very quickly is that you know the the the Gulf is not a one company town, so to speak. It's not just petroleum products, that there are a number of other things that uh come out of the strait, um, into the Indo-Pacific that are absolutely essential to manufacturing, to technology, a variety of capacities. And so we sought to explore that. As you indicated, we put our best analyst on it. We brought in um some war gamers, including you, Mira, to help us lay out uh how we would do simulations looking over the horizon if disruptions continue, what it would mean for various markets, what it would mean for consumers, what it would mean for companies, and in particular, what it would mean for governments as well.

SPEAKER_00 3:30

That is a great encapsulation, Kurt. And I want to sort of unpack that over the course of the rest of the conversation. But just for the benefit of our listeners, I just want to tease out uh a point that you've already made, which is that, of course, the Gulf is not just uh an oil and gas resource for the rest of the world. And of course, Asia is more dependent on the Gulf for its oil and gas uh than any other region on earth. But oil and gas um also has a direct relationship to many secondary products or other products that are individually exported from the Gulf, whether that's helium, whether that's naphtha, um, which is a critical ingredient in plastics manufacturing. Um, and then many of these secondary products uh are critical to high-end industries. Um, so one of the industries we looked at closely over the course of this report was a semiconductor industry, which of course is a critical part of the engine in East Asia. So what we tease out in this report, really, Kurt, is a picture of Asia absorbing the same shock in a lot of different ways based on the industries that are most critical in a particular country, how dependent they are on Gulf energy reserves, and in some cases, how much a given country had reserves of critical products ahead of this crisis. Um, so one of the things we'll talk about over the course of this conversation you and I currently is that, of course, we saw that many of our partners in Northeast Asia had weeks and weeks, if not months, of oil and gas reserves, whereas many partners in Southeast Asia had very scanty reserves indeed. And that had a lot to do with, you know, the degree to which they would find themselves in crisis and how quickly. But I'd love to hear your perspective on how this differentiated picture has really played out across Asia. For example, um, you know, Japan has suffered because it faced a naphtha shortage, again, a critical plastics derivative. India's pharmaceutical industry has suffered. And Southeast Asia, because of its lack of reserves, has had a fuel-driven inflation spiral. What is this unevenness in the way that the crisis has reverberated? Tell us about economic vulnerability and the way that it's distributed across the region in ways that we may not have recognized before?

SPEAKER_02 5:58

Mira, it's just a great question. And I would just add a couple of other components to it. It's also the case that the fertilizer that comes from the Persian Gulf through the strait is essential to a number of agricultural sectors in India. And also, we haven't really talked about sulfur, which is absolutely critical in a number of industrial processes. And again, a huge amount of supply for that comes from the Gulf. The point that I would just make, just as we get started here, Mira, is that one of the things that we saw was that this crisis came at a time when there was the probably the largest stockpiles and resiliency globally. We had the most sort of play in the system, if you will. And I think one of the things that we've seen as a result, and this is almost a global phenomenon, because most people believed, largely because of the rhetoric coming from the United States, that this would be a very short-term deal, that very few countries or companies decided to go out on open markets and purchase more capacity, right? If anything, what what happened is that they just basically built down their reserves. They um decided to tap into reserves in almost every capacity, fuel, and um you know, basically went to uh you know uh stocks already on hand. So what we've essentially done over the last four months is basically um whittle down those uh internal capacities in which they're almost gone now. And so the first thing that we're likely to see if there is a resumption of more predictable um uh you know commerce through the strait is that there will be, again, a an attempt to replace those reserves. What that means is that there will likely still be certain areas of shortages and inflation and um uh some uh challenges associated with supply for months to come. But what I think we're also seeing is that much like COVID, that it is often difficult to predict what in fact will be immediate um uh uh areas of uh shortage. So for instance, when we began the report, as you indicated, Mira, I think one of the things that we thought was that AI would be directly affected. But I think what we found generally, largely because of how much resource is available to AI companies and capacities, that frankly they would be able to weather some of the at least uh uh early challenges. But uh, as a result of being able to, for instance, go out and get helium at whatever price, then those um shortages and increases in price are passed on to other industries that frankly are reliant on it, particularly in the medical um technology arena. And so I think what we've seen is a global economy that is linked in ways that are almost, it's it's almost impossible to basically look at each and every strand. And what we are basically experiencing with COVID, with the weaponization of trade in the US-China context, with some of the Trump tariffs, and now um the closure of um the Strait of Hormuz is basically a concerted attack on a globalized network of resourcing. And um it has had very tumultuous impacts. And we have found generally that the countries with greater diversity, with more reserves, and frankly, with energy plans well understood and investments in um areas of uh renewables, that you see those countries more likely to be able to withstand challenges like the straight closure. And that's one of the reasons why we basically, I think, concluded that almost undeniably one of the early winners from this has been China, where countries that have remarkably little in the way of reserves and resilience, like Indonesia and Philippines, have faced the most heartache, Mira.

SPEAKER_00 10:44

I I want to make a pivot to this really important point about China, Kurt, because I think it's it's critical. Um, the New York Times just published a feature piece on this report. You're quoted throughout. And really the key insight that the New York Times took away from the report is the idea that Beijing actually emerges from this crisis with some substantial strategic advantages. Um, but I also want to pull on another thread that you just teased out for us in your prior answer, Kurt, which is the fact that in the last couple of years in particular, we have seen the weaponization of choke points that geopolitical analysts like you and I have known existed for years, if not decades. I'm thinking of trade interdependencies in general, but in particular China's advantages when it comes to critical minerals. Um, and now, of course, Iran's ability to choke off the Strait of Hormuz, which again, something that analysts were aware of. Um, a decision was affirmatively made not to court the possibility of Iran closing the Strait of Hormuz for many, many years because of that knowledge. Tell our listeners first, how do you measure? How do you begin to come to the conclusion that China has really benefited in some ways from this disruption? What is it about China's longer-term industrial and geopolitical strategy that has postured it relatively more advantageously? And what does that have to do with its advantages when it comes to choke points in general?

SPEAKER_02 12:18

Yeah. Thank you, Mirror. Great question. The the interesting thing about China is, first of all, probably more than any other country, they have understood the nature of global interdependence and frankly, some of the uh potential vulnerability that brings. So what China under Xi Jinping has really tried to do in many respects is to make more countries more reliant on China, but at the same time taking steps to increase and um intensify their own resilience. What do I mean by that? You you see uh China diversifying its energy sources. They probably made more investments in um uh you know clean energy and um other uh forms of uh of energy than any other country in the world. And at the same time, they have built very, very substantial stockpiles of almost everything that they might need, critical minerals, energy supplies, and the like. And so what China has been able to do over the last several months is to basically call on those reserves. Um uh and frankly, uh it has not only demonstrated its um uh capability to withstand some of these challenges, but by the fact that they did not have to go out and make purchases on open markets, it has actually created slightly more capacity for other countries that um are more vulnerable, like in Southeast Asia. So at the same time that China has demonstrated its own internal um ability to withstand these challenges, they've also, in some respects, for countries around it, I don't think this is as widely understood, but provided a kind of public good for allowing these other countries to be able to go out and make their own purchases. But I think, and and on top of that, the subtle role that China has played in the diplomacy, all of this really suggests China playing a uh being uh at least at the outset, a winner coming out of this.

SPEAKER_00 14:34

Of course, um, those of us who are watching the situation closely note that China's diplomatic role uh is quite subtle indeed. Um, you know, our friends in Beijing um have been very eager to claim credit um diplomatically, um, but I think a lot of questions about how deep their diplomacy has really gone. But another uh aspect to potential advantage from China, for China rather, of course, Kurt, is the fact that now many countries around the region and beyond are looking to diversify their energy resources. And for some countries, you know, those who can least afford it, that may mean kind of a relapse back into coal. But for many others, they're looking to invest more heavily in clean energy. And that's a sector in which China is dominant. So if resilience in the future um involves doubling down on a clean energy strategy, China's also likely to be a winner in that capacity. Is that right?

SPEAKER_02 15:27

That's right. And Mira, I would just simply say what you're seeing is kind of an all of the above strategy. Um, what number one um countries seeking to relieve the basic tensions associated with the closure of this very narrow strait? That means looking at land routes. Now it takes time to build pipelines. But as you also indicate, Mira, basically looking at other um forms of energy, natural gas, coal, but also renewables as well. So basically, what this has led to is an all of the above strategy. And the countries that have the most integrated networks and how to think about this, I'd put China near the top of the list, are the clear winners going forward. But at the same time, um, many of these diverse capacities can't be turned on overnight. They require substantial investment time. And so even a country that had sought to move away from this dependency will find themselves struggling for a can a considerable period of time as you seek to diversify going forward.

SPEAKER_00 16:39

Absolutely. And that sort of brings me to the question of how these diversification efforts will proceed and kind of who has how much room as they try to cope going forward. You know, we um have already had some examples over the course of this conversation. You, of course, mentioned that China um was planning for a very long time for its own uh energy security. I would also add Japan to the list of countries that have spent decades planning for an energy security-related crisis, which meant that the Japanese government had many months of oil and gas reserves to draw on. So while they experienced a lot of fiscal pressure, a lot of price pressure over the course of this crisis, they did not experience the same supply shocks that other countries did, at least in the oil and gas sector. What have you learned by leading this effort, Kurt, about what kind of separates the countries that have managed this relatively deftly from those that have really struggled? And what does that tell you about who and where we're likely to see resilience efforts going forward? You know, you've already mentioned this is going to be an all of the above strategy. But if I'm one of many governments in Southeast Asia, I am laser focused on the question of how we can build up our reserves so that we don't have to try to resort to the same emergency measures that we've just experienced in the next few months if the strait were to close again. But I'm curious how you're digesting this differentiated lessons learned for the sake of resilience building.

SPEAKER_02 18:15

Mir, it's a great question. And, you know, if you look at a lot of countries in Southeast Asia, there are always more things that you're seeking to do than you have fiscal or government capacity to address. And so, for instance, Indonesia's been very focused on um feeding large numbers of people through kind of a subsidized uh meal program. They also subsidize some energies um uh associated um with their farming community more generally. Um, all told though, however, they have basically been uh accepting of just remarkable degree of reliance on foreign supply. And I think this conflict, as have previously, have underscored that that being in this situation creates an enormous potential vulnerability. So over time, I would expect each of these countries to basically take on multifaceted um strategies. And that means more um uh inbuilt uh resilience capacities, that means more um uh critical reserves that are kept. That takes time to build up, um, probably more commitment to renewable energy sources and also exploring diversification um into other uh hydrocarbons as you've described. Many of these countries had moved substantially away from coal, now are basically in a period of uh uh utilizing that again. China is in that category as well. And so I think what you're gonna see is that the consequence from this will be probably a higher degree of release of carbon into the uh atmosphere because of burning coal. You will see countries basically spending much more time trying to devise and divine uh energy strategies that get it uh more resilience. But, Mira, as you indicated, this will not be easy. These are expensive, they require lots of capacity, lots of foresight, and this will be one of the issues among a number of uh things that countries are are seeking to deal with, like um, you know, uh food shortages as well. And so, you know, it will be, I think, top of mind for a while. But if markets reopen, sometimes you lose that discipline and that determination to act. I wouldn't be surprised if some of that happened as well.

SPEAKER_00 20:55

Yeah, it's it's a great point, Kurt. Um, and it's also a great transition to the the next question I wanted to ask you. You know, we we've been really teasing out some of the substantive insights from this project, but I love to turn to at least one thing that I think really makes this effort methodologically unique and therefore especially useful. And that is the fact that over the course of uh the study period, the Asia Group was not just drawing on data from the entirety of the Straits of Hormuz closure and the time period before that, um, but really used a quite innovative toolset and AI-enabled scenario exercise capability, um, which allowed us to simulate and resimulate the effects of this crisis period on the markets in question, um, and increasingly improve our understanding of what the effects on these markets might look like if the crisis continued for 30 days, 60 days, 90 days. Tell us a little bit about why scenario modeling. Is especially useful in a crisis like this one, where it's not only a global shock that we experience, but a series of interconnected shocks that are so intricate as you've been laying out, and where the primary effects really don't begin to tell you the story about the secondary and the tertiary ones and why, in a situation like this one, um, scenario modeling uh is really quite helpful to analysts.

SPEAKER_02 22:25

Um Well, Mir, I think our hunch was that you know, you and I, as people who have been in government, have participated in a lot of war games and scenarios, and they are almost always helpful in um uh allowing you to explore the dynamics of a certain circumstance. But I think probably both of us have been in um uh the had the experience that after doing one, you think, God, I really wish we could have run this a couple of more times to see if we adjust one or two variables what that means. That is essentially what we've been able to do here. So we've basically combined three communities here that are unique. First is, as I indicated, people have really good understanding of how you design war games or scenarios. Mira, you were top of mind here in terms of being able to provide that capacity. And remember, the design is as important as anything else. Um, you know, you you know, if you put bad stuff in, you get bad stuff out. So the better way to use and utilize AI is that your inputs have to be excellent and precise. Secondly, we brought sort of world-class expertise who really understand data, who who are able to give you interpretations of leadership dynamics, how decision making takes place in complex situations regionally. And that that was really unprecedented. And we match that with our AI engineers who are designing basically a capacity whereby we can run a series of simulations varying just a couple of things, either the severity of the crisis, how much um restriction has there been, and vary the nature of the actors involved to render different insights. I think we've done this on a couple of countries and industries so far. I have found the um uh the revelations that come from this, the predictive uh elements to be fascinating and gives you a sense of areas where you need to be attentive to particular um uh shortages or shortfalls. One of the things I think all of our scenarios tended to run is that generally, although we have been able to get to this point with some disruptions, with some um uncertainty, uh heightened inflation, I don't want to diminish anything that we've seen, but at the same time, Mira, I think almost all of the uh runs that we did through this capacity reveal that if the restrictions and shortages continue, we will likely see much more damaging and cascading effects just in the weeks ahead.

SPEAKER_00 25:24

Another really important segue, Kurt, because um, you know, the team here at TAG was wrapping up their analysis right around the time uh that the United States and Iran concluded the MOU, uh, that at least very temporarily put a pause on the dynamics that we've seen unfold over the course of the last several months. Um, of course, we know that even with that MOU in place, this is not a return to status quo ante. Um, the, you know, the way that traffic through the strait is controlled is still very much coming into view. We've seen just in recent days that attacks are still possible, even with this MOU in place. And as you've already alluded to, Kurt, because energy and other product supply shocks have very long tails, even if the strait were to reopen on an unfettered basis, it would take months, if not years, to fully restore all of the supply online that has come off in the last few months and to get those products to the countries where they are destined. So there is a lot of reason to believe that even though we are no longer at the height of this conflict, there will continue to be volatility in the straits that will shape trade, commerce, and geopolitics again for months, if not years to come. What advice do you have to listeners, and in particular to businesses who are thinking about how to return to a savvy geopolitical approach in the Gulf and in the Gulf as it's connected to the Indo-Pacific about how to manage this uncertainty at a time of such heightened geopolitical tension and with the inherent interdependencies that you've described for us here today?

SPEAKER_02 27:10

Um, Mira, that was that was remarkable the way you just laid it out. That's exactly right. I mean, the first thing I would just basically offer, despite the fact that, I mean, first of all, can I just say that that you know, we've talked about this MOU and this, you know, the various kind of negotiations, but in the last several days, we've had basically uh um uh exchanges of fire that are really quite severe. So it looks a little bit like the conflict continues just in different forms. Um that would be my expectation that that we are actually not as close to settlement as many would speculate. And this has been a remarkable performance by the president almost every day to say, look, you know, pieces at hand, and to frankly have markets buy it. That's one of the reasons why almost all companies and countries are making decisions to play down their, you know, their reserves, as we've already discussed. I think, again, the point I would make is the one that you just underscored. We're not going to go back to a situation that resembles the one before the conflict. I believe that Iran will always now assert control. I think in almost all circumstances, it is likely to be a heavier hand than um predicted. And um there will be countries that are favored in this process and those that are not. Um I also uh, you know, would just simply say that you know, if your strategy has 70, 80, 90 percent of your energy flows and flows of other critical commodities coming through the Strait of Performer Moose, you better start thinking very quickly about how to diversify.

SPEAKER_00 28:58

Kurt Campbell, no safe harbor is a really valuable contribution at a critical time. Thank you so much for sharing your insights with us today, and as always, for your leadership.

SPEAKER_02 29:08

And if I can say thank you, Mira, your role in it was remarkable. Helped us think strategically about it. Uh, I hope it gives us an opportunity to help uh both uh governments, uh companies, consumers uh think more clearly about the implications of what we're seeing play out uh on a daily basis uh in the Middle East. Thank you for this, Mira. Look forward to seeing you soon.

SPEAKER_00 29:34

Absolutely. As I reflect on my conversation with Kurt and my own participation in this really comprehensive research effort here at the Asia Group, I am struck by how much of this story is still unfolding. Whether it is the fact that the closure of the strait not only had major effects on energy markets, but on secondary and tertiary supplies, or the fact that there is almost no chance of a status quo anti-return in the Strait of Hormuz and disruptions likely to continue for months, if not years. We are only just beginning to understand what the reverberations of this crisis will look like and how they will reshape our markets, our supply chains, and our geopolitics over the medium and long term. I encourage you to take a look at the report yourself so you can begin to digest some of its findings as this story unfolds. You can find the report at straight of hormouse.theasia group.com. What comes next is produced by Refund Duyastino and executive produced by Lauren Dewick. It contains music by Cody Martin via Soundstripe. What comes next is a production of the Asia Group and is powered by Tag AI, Tag's geopolitical decision engine for business. We'll see you on the next episode.