Singapore businesses to brace for higher energy costs, supply chain disruption from Gulf conflict

[SINGAPORE] The conflict between the US, Israel and Iran will likely result in higher costs for businesses on volatile energy prices, disrupting supply chains, said observers.

“The escalation of conflict in the Middle East is a concern for Singapore businesses, less because of direct exposure to the region, but because of its impact on global energy markets, shipping routes and business confidence,” said Kok Ping Soon, CEO of the Singapore Business Federation (SBF).

As a highly open and trade dependent economy, Singapore is vulnerable to external shocks, with effects quickly transmitted through higher logistics costs, energy price volatility and supply chain disruptions, he added.

On Saturday (Feb 28) the US and Israel began military strikes on Iran, killing Iran’s supreme leader Ali Khameinei, as Iran launched retaliatory attacks on Israel, Kuwait, Qatar, Bahrain and the United Arab Emirates (UAE).

Economists and business association leaders said that volatile and likely higher oil prices are the most immediate risk, particularly if shipping through the Strait of Hormuz is curtailed.

One-fifth of the world’s crude oil flows through this sea lane, which connects major oil producing countries of the region to the Arabian Sea.

Barrelling on

“Oil prices have already reacted, same with precious metals. When markets open, there may be a knee-jerk reaction again. It really depends on how prolonged the conflict is, so it is hard to quantify how long oil prices will stay elevated,” said OCBC’s chief economist Selena Ling.

Brent crude prices rose to a high of more than US$70 per barrel in recent weeks in anticipation of the strike on Iran, with some international observers predicting prices as high as US$100 per barrel to come.

Ling said that if physical supply through the Strait does stop, elevated oil prices could last months rather than weeks. It would also depend on the amount of spare capacity other producers have and any possible US Strategic Petroleum Reserve deployment, of which there is no indication so far.

If supply is indeed curtailed, Ling said, it could accelerate global inflation with Asia disproportionately impacted as most countries in the region are energy importers, with growth driven by energy-intensive data centres.

Singapore would face a dual impact on consumer prices and trade, with airlines, heavy industry and shipping most vulnerable, while energy producers and commodity exporters would benefit.

Multiple observers also said that higher oil prices would also affect electricity tariffs, fuel costs for transport, and the wider economy through related fossil fuel supplies.

For instance, the Strait of Hormuz is also a vital route for liquified natural gas, with Qatar being the second largest exporter of the gas, which is used in powerplants, manufacturing and cargo ships.

Sea more uncertainty

Supply chains are also at risk as maritime and aviation routes face major disruptions, given that the Middle East is a gateway between Asia and Europe.

“Like with (the Suez Canal in 2023) trade is being redirected, this will add to shipping costs because of longer transit time and fuel costs between Europe and Asia and that adds to overall uncertainty as well,” said Song Seng Wun, economic adviser at SDAX, a Singapore-based fintech company.

Shipping companies have begun to redirect vessels around the Cape of Good Hope while avoiding the Middle East, mirroring a similar move in 2023 when ships avoided the Suez Canal as a result of Houthi militant attacks.

The longer route adds as much as 14 days to general shipping times, as costs rose by as much as 15 per cent in 2023.

Song said that this could affect Singapore especially as wholesale trade has become the largest contributor to the services sector, itself the biggest segment of the economy.

Eric Leong, chairman and chief executive of Mlion, a supplier of steel and steel products, said he was concerned about the impact of freight from Europe to Asia.

“The price for freight will shoot up and insurance will be affected too,” he said, adding that the company – which has an office in Saudi Arabia and operations in the Middle East – had held off on some shipments as it expected port delays.

However, some observers expect more potential disruption in aviation. Iran’s retaliatory strikes have closed major regional air hubs Doha, Dubai and Abu Dhabi, cancelling more than 1,000 flights and stranding hundreds of thousands of travellers.

Lennon Tan, president of the Singapore Manufacturing Federation (SMF), said: “When Gulf hubs face airspace restrictions and flight cancellations, the impact is not only on passenger travel – it hits airfreight capacity, transit times, and the reliability of ‘urgent’ supply chains for electronics, precision parts and high-value shipments.”

Early aviation data and reporting show a sharp jump in cancellations and widespread rerouting around Middle East airspace, with major gateways such as Dubai and Doha central to east–west flows, he said.

More volatility, rising costs

Given the scale and severity of the situation, observers emphasised that ongoing uncertainty could affect various sectors and business confidence, and that companies would need to prepare for this volatility.

“For Singapore, the first-order effect is not just higher oil prices – it’s higher volatility. Volatility raises hedging costs, disrupts shipping insurance, and forces businesses to hold more inventory and working capital,” said SMF’s Tan.

“Volatility in oil prices will also feed into transport, utilities and input costs, affecting margins across multiple sectors, particularly for SMEs,” said SBF’s Kok.

Mark Lee, SBF vice-chairman and honorary treasurer, said that headline business-cost relief in 2025 for Singapore was helped by falling energy and freight prices, while underlying pressures of rising labour costs remained.

If energy and freight costs shoot up, this would increase cost pressures on some sectors, particularly food and beverage and retail.

“I do believe there is scope to work more closely with the government to identify sector-specific pressure points – including wages, manpower constraints, compliance costs and operating models – and to develop targeted interventions that preserve competitiveness without undermining local workforce outcomes,” he said.

“Depending on how long oil prices remain high, business and consumer confidence could be affected and we would see a pullback on the AI (artificial intelligence)-led frenzy that has led to infrastructure investments like data centres,” said SDAX’s Song.

Finger in the wind

Industry figures said that companies with operations in the Middle East will have to weather the uncertainty for now, while those planning expansion there should hold off.

“Businesses that have exposure to the Middle East may have to deal with the spillover effects such as trade diversion and/or higher risk premiums until things settle or there is light at the end of the tunnel,” said OCBC’s Ling.

Ang Yuit, president for the Association of Small & Medium Enterprises (Asme), said the conflict might set back business activities in the Middle East, and another market it is a stepping stone to – Africa.

But the instability could also draw additional investment interest to Singapore as a place of stability.

“Among the regions competing with us for investment and hub position, Dubai and the Middle East were strong contenders as a safe haven, with its financial inflows and in recent times, in AI and high tech industries. I think companies would review their diversification strategies now, or at least, not put all their eggs in one basket,” he added.

For Singaporean companies, continuing to build resilient supply chains, diversify and internationalise is important.

“If you have the ability to, say, operate in Johor-Singapore Special Economic Zone, you are better able to ‘average out’ price shocks like electricity costs. Immediately, we can’t do much about energy costs for example, but we must look at medium term moves,” he said.

SBF’s Kok said companies should “take a proactive approach by reviewing their supply chain resilience, managing costs and currency risks and maintaining close communication with customers and partners”.

But it is also clear that this is the early stage of a wide-ranging event that will have major consequences.

“It is going to be a wild ride. This will likely affect Singapore even more than the Ukraine conflict, especially if it spreads to the other Middle Eastern countries,” said Ang.

In the meantime, Mlion’s Leong said its staff are working from home temporarily, and they have reported that things are still calm in Saudi Arabia. “So far, there are no major effects yet. But for now, it’s very early and too hard to say what we will do next.”