“Prolonged Iran War Could Lead to Power Shortages and Hit Taiwan’s Semiconductor Industry” - Oxford Economics

If the war between the United States and Iran continues for more than six months, Taiwan—heavily reliant on Middle Eastern liquefied natural gas (LNG) for its power supply—could face electricity shortages that would negatively impact its semiconductor industry, according to a new analysis.

In the short term, electricity can be prioritized for the semiconductor sector over other industries, but in the long term, disruptions to semiconductor production are seen as inevitable.

Oxford Economics, a UK-based think tank, highlighted these findings in a report titled “Silicon’s Achilles heel is energy supply,” published on its website on March 23 (local time).

The following is a summary of the key points.

Taiwan’s Heavy Reliance on LNG for Power...Storage Capacity Only 10–14 Days

The war between the United States and Iran, along with the suspension of LNG exports from Qatar, has effectively removed about 20% of global LNG supply from the market. This is delivering a significant shock to Asia’s energy-intensive technology cycle.

The risks are not limited to oil and natural gas. Refined petroleum byproducts such as sulphur, which is critical for the extraction of copper and cobalt, are also experiencing supply disruptions due to operational difficulties at Gulf region refineries. Both metals are key inputs in semiconductor and electrification supply chains.

Taiwan and South Korea are at the core of advanced semiconductor production, while Japan supplies a significant portion of the precision materials and manufacturing equipment used by major foundries. All three economies are highly dependent on energy imports. Among them, Taiwan is structurally more exposed than its regional peers due to its electricity generation mix.

Taiwan’s main vulnerability lies in power generation. The country is highly dependent on LNG for electricity, and this reliance has become even more pronounced since the closure of the Maanshan Nuclear Power Plant last year, which removed a critical stabilizer from the grid. Taiwan’s LNG storage capacity is only enough for about 10–14 days, which is significantly less than Japan’s roughly three weeks and South Korea’s 30–60 days, according to external estimates.

Meanwhile, advanced semiconductor manufacturing in Taiwan is becoming increasingly energy-intensive. The most advanced processes, such as 3-nanometer and 5-nanometer chip production, require vast amounts of power and extremely stable electricity supply. Oxford Economics estimates that manufacturing related to artificial intelligence already consumes more than 20% of the total output of Taiwan Power Company.

No Immediate Impact on Semiconductor Production in the Short Term

Taiwan’s national power grid is integrated across the island, but energy demand is not evenly distributed. The largest industrial loads are concentrated in the southern science parks where cutting-edge fabs are located, while residential and service sector electricity consumption is heavily skewed toward the north.

This geographic concentration becomes particularly important during periods of high energy demand, especially in winter. During such times, Taiwan’s power system essentially engages in intra-island energy arbitrage. In these circumstances, base-load electricity capacity is actively redistributed to reliably maintain the southern semiconductor production clusters. As a result, the north and central regions bear the adjustment burden, sometimes facing planned load shedding or, in some cases, unstable power supply. Similar patterns were observed during the gas supply disruption in Datun in mid-2017 and the Xingda power plant failure in mid-2021, when electricity was also prioritized for semiconductor complexes.

Macroeconomic indicators support these decisions for priority grid allocation. While every energy shock is shaped by the conditions at the time and influenced by multiple variables, the responses by Taiwan and the region to upstream energy supply disruptions in the tech supply chain provide clear lessons.

According to standard impulse response function analysis, a sudden reduction in Taiwan’s LNG supply typically causes overall domestic industrial production to decline by about 0.5% immediately. However, the initial impact on semiconductor production is notably smaller, at roughly half that rate.

This suggests that advanced semiconductor plants can continue operating during the early stages of an energy shock, and as a result, headline production metrics may remain relatively resilient for several months. However, this protection comes at a significant cost. Artificial shortages of energy immediately lead to higher electricity prices, which in turn drive up logistics costs and create cost-push inflationary pressures in other sectors.

Resilience Weakens Over Time

However, this resilience erodes over time. About six months after the shock, impulse response calculations show that industrial production falls about 0.7% below baseline, indicating a statistically significant and persistent downward shift in production trajectories.

This loss of momentum is partly due to the growing limitations of prioritized grid allocation over time, and partly reflects the harsh physical constraints of advanced semiconductor manufacturing. Wafer fabrication is a highly rigid, continuous process, with production cycles sometimes lasting up to three months depending on chip complexity. Equipment used in leading-edge fabs, such as extreme ultraviolet (EUV) lithography systems that “print” minute circuit patterns, require ultra-stable voltage. At this level of precision, even millisecond-scale power fluctuations can result in the loss of an entire wafer lot.

From a macroeconomic perspective, this creates a kind of hysteresis effect—meaning that the energy shock does not simply reduce output temporarily, but can push not only semiconductor production but also the broader industrial production path onto a lower trajectory for an extended period.

Regional Spillover Effects May Be Limited at First, but Can Grow Over Time

Taiwan accounts for about 60% of the world’s semiconductor foundry capacity. Therefore, disruptions to Taiwan’s electricity system pose significant supply-side risks to global technology production, especially the technology-intensive supply chains in Asia.

However, the immediate impact on Asian manufacturing is likely to be more limited than generally assumed. Downstream electronics production typically lags behind upstream semiconductor manufacturing, providing a buffer before supply shocks ripple through the broader regional manufacturing sector, as confirmed in recent reports.

Inventory flows further reinforce this lag effect. Although not all inventory accumulation is related to technology, with the exception of Thailand, many Asian countries have gone through phases of inventory restocking in recent quarters, providing additional short-term cushioning within the electronics supply chain.

Therefore, the key risk of upstream semiconductor disruptions lies less in the scale of the initial shock and more in its duration. Once inventory buffers begin to run down—usually two to three months after the initial shock—the impact on downstream sectors will become increasingly pronounced across the regional manufacturing supply chain. According to modeling, statistically significant downward pressure on industrial activity emerges from about the third quarter following the initial upstream energy shock.

Unlike a simple, localized production disruption, the current Middle East war could escalate into a much broader energy supply shock for all of Asia. If that occurs, multiple channels—including higher energy prices, rising power generation costs, and increased prices for industrial inputs—will transmit these shocks simultaneously, tightening production conditions across the region. The more dependent an economy is on energy imports, the greater the cost pressure on industrial output as these shocks are passed through.

Nevertheless, the Asia region is coping with this initial shock relatively well. While Oxford Economics’ war-related scenarios suggest some slowdown in industrial activity, this is unlikely to derail the ongoing AI-driven manufacturing cycle across Asia.

Diversifying Taiwan’s LNG Imports Is Possible, but Constrained

Recent market prices indicate that the current LNG supply disruption could last several months rather than just weeks. However, if shipping disruptions through the Strait of Hormuz persist beyond mid-May, it will become even more difficult for Taiwan to replace Qatari supply.

Theoretically, Taiwan can diversify its LNG import sources. In practice, though, there are substantial constraints. Australia already supplies about one-quarter of Taiwan’s LNG imports, but much of Australia’s LNG is locked into long-term contracts with Japan, South Korea, and China, making it difficult to quickly redirect shipments elsewhere.

It is also possible to divert Atlantic basin cargoes—LNG that would normally be destined for Europe or the Americas—to Asia, but this would require longer shipping routes and higher freight costs. Taiwan’s authorities are also considering increasing imports from the United States and investing in US LNG infrastructure projects, such as the development of Alaskan LNG.

These measures offer important geographic hedging in the medium term, but in the short term, policymakers will have to contend with the harsh economics of the spot market. Asian spot LNG prices are now expected to rise further in the second quarter, averaging around $18 per MMBtu (compared to $10.66 on February 20 of this year, prior to the war).

Historically, Asia’s technology manufacturers have rarely responded to higher gas prices by reducing output. Instead, the financial burden is typically transferred to the balance sheets of state-owned power utilities. This is a particular concern for Taiwan and South Korea, where utilities already operate with high debt levels and limited financial buffers. As a result, procuring LNG at elevated spot prices means that global energy price increases are directly transferred to the public sector’s balance sheets, further straining national finances.

This content was produced with the assistance of AI translation services.