How a War in Iran Is Hitting South Korea's Economy

The Strait of Hormuz is effectively closed. And four weeks in, the queues at Seoul's gas stations are getting longer.

When Israel and the United States launched strikes on Iran, the immediate images were of missile trails over the Persian Gulf. But the economic aftershocks have traveled much farther—all the way to the Korean Peninsula. South Korea's KOSPI index suffered its largest-ever two-day decline when markets reopened, dropping 18%. It has since partially recovered but remains 13% below its pre-war level. The won has fallen to around 1,500 per dollar—levels not seen since the Global Financial Crisis. These aren't just market jitters. They are the early symptoms of a deeply integrated economy absorbing a distant shock.

The Energy Exposure Nobody Wanted to Talk About

South Korea has almost no domestic oil or gas. It imports 62% of its petroleum from inside the Strait of Hormuz and 20% of its LNG from the Middle East. With Iran signaling its intent to keep the strait effectively blocked, those figures have transformed from routine trade statistics into a map of economic vulnerability.

Seoul isn't without defenses. The country maintains a strategic petroleum reserve equivalent to more than 200 days of supply, and in coordination with the IEA, it plans to release 22.46 million barrels to help stabilize global markets. But LNG is a different story. Legal reserve requirements mandate only nine days of supply. And the damage from Iranian strikes on Qatar's LNG infrastructure is expected to keep 17% of Qatari production offline for three to five years—a figure that Goldman Sachs estimates represents 19% of global LNG supply.

The downstream effects are already visible. Fuel oil prices have surged 87.5% since the war began. Jet fuel has doubled. Korean Air has tripled its fuel surcharges on some routes. Seoul has responded by imposing price caps on refined petroleum products for the first time since 1997 and launching price monitoring for 23 essential consumer goods.

When a Petrochemical Shortage Stops a Washing Machine

Energy is the headline. But the subtler—and potentially more durable—problem lies deeper in the industrial supply chain.

Of 41 key inputs identified in South Korea's industrial supply chains, 70% are sourced from the Middle East, particularly Turkey, Saudi Arabia, and Israel. The most immediate bottleneck is naphtha, the primary feedstock for South Korea's petrochemical sector, which accounts for roughly 7% of the country's exports. South Korea imports more than 70% of its naphtha from the Middle East.

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LG Chem has already declared force majeure on exports of dioctyl terephthalate—a plasticizer used in everything from medical tubing to car interiors. Yeochun NCC followed. Lotte Chemical and others have warned they may be next. The cascade runs further than most people realize: naphtha feeds ethylene, which feeds the automotive sector, the healthcare industry, shipbuilding, and consumer appliances. Even plastic garbage bags are facing production delays.

The geopolitical irony is sharp. After Russia's invasion of Ukraine, South Korean firms rapidly pivoted away from Russian naphtha—which had previously supplied 26% of their needs—and deepened their dependence on the Middle East. Now, with Middle Eastern supplies disrupted, some of those same firms are asking the government to consider resuming Russian imports.

The Semiconductor Risk Is Real—Just Not Yet

South Korea's semiconductor industry—the backbone of its export economy—faces risks that are currently manageable but could become serious if the war drags on.

Samsung and SK Hynix source 97.5% of their bromine from Israel and 64.7% of their helium from Qatar. Both materials are critical to chip manufacturing. For now, existing stockpiles and a pre-war market surplus in helium provide a buffer. But these are pressure points, not resolved problems.

The demand side may be the bigger near-term concern. South Korea's high-bandwidth memory (HBM)—the specialized chip used in AI accelerators—flows primarily to Taiwan, where TSMC fabricates Nvidia's AI processors. Taiwan generates 53.3% of its electricity from LNG and is expected to face supply shortages by late April. If TSMC's fabs face power constraints—as Samsung's Austin facility did during a 2021 winter storm, sitting idle for weeks—demand for South Korean HBM could drop sharply.

Meanwhile, AI data centers in the Middle East, which were set to be a major growth market for advanced chips, are now under literal attack. An Amazon data center in the UAE was struck. The region's AI infrastructure buildout, once a reliable demand driver, is now an open question.

How Long Can South Korea Hold?

Economists are running the scenarios. A short war: the current pressures are painful but manageable. A three-month conflict: growth falls by an estimated 0.3 percentage points. A year-long war: growth approaches zero, with stagflation—the toxic combination of stagnant growth and rising prices—becoming a real risk.

The Middle East accounts for only 3% of South Korea's total exports, but that figure obscures sector-specific exposure. Hyundai Motor Group holds 15% of Middle East automotive market share, and the region represents 10% of its global sales. A prolonged regional recession would hit those numbers hard.

For now, Seoul is managing on multiple fronts: capping petroleum exports at 2025 monthly levels to protect domestic supply, raising output caps on nuclear and coal power plants to compensate for LNG shortfalls, and coordinating with international bodies to release strategic reserves.