- Taiwan is highly exposed to oil price shocks amid the Iran conflict
- Direct export exposure to the Middle East is minimal.
- An oil price shock would pressure Taiwan’s “Goldilocks” mix of strong growth…
- … and contained inflation, but is far from causing stagflation
- The central bank retains monetary policy flexibility.
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The ongoing conflict involving Iran and the US/Israel has immediately impacted global energy markets and maritime trade. Roughly 20–30% of the world’s crude oil and liquefied natural gas (LNG) passes through the Strait of Hormuz, and disruptions there have reduced the flow of Middle Eastern oil and LNG. Markets have responded, pushing Brent crude and other benchmarks higher. Meanwhile, insurers have withdrawn war-risk coverage, and major carriers have suspended Gulf transits, creating vessel backlogs and higher freight costs. Alternative routes around Africa increase transit time and costs, although shipping and logistics are gradually adjusting to these challenges.
Energy exposure
Taiwan is highly exposed to oil price shocks due to its energy structure. The island relies heavily on thermal power, which accounts for around 85% of electricity generation. Although renewable capacity has expanded in recent years, much of the increase has offset the phase-down of nuclear power rather than materially reducing fossil fuel dependence.
Nearly all thermal fuel inputs are imported. Net fuel imports accounted for around 4% of nominal GDP in 2025, among the highest ratios in Asia, leaving the economy sensitive to sustained increases in global energy prices and shipping costs.
Taiwan sources roughly 70% of its crude oil from the Middle East—particularly Saudi Arabia, Kuwait, and the UAE—and about 30% of its LNG from Qatar. A prolonged disruption in Hormuz would tighten supply and raise costs, although strategic reserves and diversified suppliers reduce the risk of severe shortages.
Higher input costs would raise electricity tariffs and production costs, particularly for energy-intensive sectors such as petrochemicals, steel, and semiconductor fabrication. Households would face higher energy bills, although government subsidies and ongoing wage growth should help cushion the impact.
Trade exposure
Taiwan’s direct export exposure to the Middle East is minimal, accounting for less than 1% of total exports in 2025. Europe accounts for around 6%, suggesting that shipping disruptions in the Red Sea or Suez Canal would have only a limited first-round impact on trade volumes.
The larger risk comes from second-order effects of higher global energy costs. Elevated oil prices act as a tax on consumption, reducing household purchasing power in key markets such as the US and Europe. This could dampen demand for consumer electronics, PCs, and smartphones. However, structural technology trends continue to support Taiwan’s exports. AI-related investment, data centers, and industrial policy-driven growth provide a cushion, helping offset a slowdown in traditional electronics exports.
Macro implications
An oil price shock would weigh on Taiwan’s “Goldilocks” mix of strong growth and contained inflation, but it is far from triggering stagflation. If oil stabilizes around US$80/bbl, GDP growth could slow by roughly 0.3ppt, with CPI rising about 0.4ppt. If oil reaches US$100/bbl and remains at that level for the rest of the year, GDP growth could decline by about 0.9ppt, and inflation could rise around 1.3ppt. These estimates exclude additional drag from weaker global demand, which could further affect exports and GDP.
The central bank retains flexibility. With a base-case GDP growth forecast of 7% and CPI at 1.5%, the risk of inflation exceeding 2% may initially outweigh the risk of growth falling below potential (~3%), supporting a bias toward tightening. If external demand weakens and export momentum slows, policymakers can pivot toward easing to stabilize growth.
Market implications
Financial markets remain another channel of adjustment. Taiwan’s equity valuations are high, with total market capitalization of the TWSE exceeding 300% of nominal GDP. Heightened geopolitical risks may prompt global investors to reduce exposure to high-beta markets. Still, strong corporate earnings and technology sector growth provide resilience, helping the market absorb shocks without destabilizing the broader economy.
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Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
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