‘What happens in Asia doesn’t stay in Asia’: Raghuram Rajan warns Hormuz shock will hurt US

Former Reserve Bank of India Governor Raghuram Rajan has warned that a prolonged conflict disrupting global energy supplies could push crude prices to as high as $150 to $200 a barrel, with ripple effects across economies, including the United States.

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Rajan said the duration of the conflict would determine the scale of the impact, but added that the damage had already begun. “Even if it ends in weeks rather than months, the damage will be significant – both in terms of the fact that we’ve got disrupted energy for about 20% of the total production of energy sources across the world,” he said in an exclusive interview with India Today TV.

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The noted economist was referring to the near closure of the Strait of Hormuz, a critical global shipping corridor through which a significant share of the world’s oil and liquefied natural gas supplies passes.

Rajan suggested restoring the oil supply would take time. “It will take time to transport that. There is damage already.” While some countries have managed to cushion the shock by drawing on reserves and diverting cargoes, he said the longer the disruption continues, the greater the impact.

“The worry people have is if you’re trying to adjust to the fact that 15 to 20% of the world’s energy sources are shut in, you have to have tremendous demand destruction to make that possible, which means oil prices will be in the $150 $200 a barrel range which we haven’t encountered before – certainly the 200,” he said.

Such a scenario, according to the former RBI Governor, would add to existing pressures on inflation and interest rates. “This is coming on top of the fact that in countries like the United States, inflation is still not dead. And so with high energy prices, with stag-flationary effects of oil shut in, there’s also the fact that the interest rates have to stay higher to combat inflation – and economies aren’t positioned for that.”

He pointed to rising risks in financial systems if the disruption persists. He said many were prepared for a gentle slowing of interest rates, “many have large fiscal deficits and huge amounts of debt, and financing that will become a problem. So you will start seeing risk from the financial sector if this lasts much longer.”

The impact, he said, would be most visible in Asia but would not remain confined to the region. “The biggest exposure comes from the big Asian economies – Korea, China, Japan, and India. But also, what happens in Asia doesn’t stay in Asia.”

Rajan noted that competition for remaining energy supplies would intensify globally. “There’s already competition between Asia and Europe for natural gas resources that are still available. So prices will show up everywhere, including the United States.”

The economist added that while the US produces much of its own energy, consumers would still feel the effect through fuel costs. “One of the biggest concerns for US consumers is the price of petroleum because they drive long distances…with affordability being a big issue, it definitely has to weigh on the administration’s mind.”

He said political pressure in the United States to contain fuel prices could shape the trajectory of the conflict. “That’s one reason people think this war will perhaps be over sooner rather than later because the political pressure on the administration to bring the price of oil down will be huge.”