Nearly a fifth of the energy that powers the island is stranded in the Persian Gulf. The energy crisis risks throwing the immense Taiwanese microchip industry into crisis, with cascading effects.
The energy crisis triggered by war in the Middle East and the consequent interruption of energy supplies is forcefully hitting Asia, more exposed to hydrocarbons coming from the Persian Gulf compared to Europe and North America.
However, it is precisely in East Asia that the production of semiconductors (also called microchips), essential engine to power artificial intelligence and, more generally, all the most advanced electronics.
Among the most important players in the production of semiconductors (and among the most exposed to the closure of the Strait of Hormuz) is Taiwanwhere almost all of the most advanced chips are manufactured.
The importance of Taiwan for semiconductors
To be very explicit, Taiwanese microchip production is simply irreplaceable.
Suffice it to say that a single company, the Taiwan Semiconductor Manufacturing Company (TSMC), itself produces around 90% of the most advanced chips used by Nvidia, Apple and all the major technology companies.
Simply put, almost all of the semiconductors inserted into Nvidia’s graphics cards or Apple’s iPhones are manufactured by Tsmc in Taiwan.
As can easily be imagined, this process is highly energy-intensive, not surprisingly, according to an analysis by S&P GlobalTsmc factories consume between 8 and 9% of all Taiwanese electricity production.
Microchip factories are in fact linked to Taiwanese national electricity grid, which is powered by just under 50% liquefied natural gas (LNG), mostly coming from the Middle East.
The impact of the closure of Hormuz
It is therefore easy to understand how the energy crisis now underway puts at risk not only the production of microchips, but also the energy security of the island.
In fact, approximately 40% of the LNG imported by Taiwan came from the Persian Gulfwith Qatar which until a few weeks ago was the island’s main supplier. Overall, therefore, LNG from the Persian Gulf alone generated approximately 16-17% of all electricity Taiwanese.
Complicating matters are the very low strategic LNG stocks. According to official estimates from the Ministry of Economic Affairs of Taiwan, in fact, The island’s strategic supplies amount to just 11 days of liquefied natural gas consumption.
The possible consequences
The possible consequences of a prolonged crisis are potentially devastating. If LNG supplies ran out without new supplies being able to make up the LNG deficit overall, Taiwan would be forced to ration electricity.
The island’s authorities would therefore have to decide whether to guarantee electricity to their citizens or power the Tsmc factories, which represent approximately 20% of the island’s GDP.
Industrial blackouts, as reported by Craig Singleton (senior fellow at the Foundation for Defense of Democracies) at Politico, they could «ripple directly into global chip supply chains, which underpin everything from AI servers to cars».
If Tsmc made it known last week of don’t predict «significant impacts» in the short term, it is also true that every day that passes brings the worst case scenario closer.
Any interruption in production would have immediate impacts on global supply chains: AI servers would stop updating, automotive assembly lines would stop (as already happened during the Covid crisis).
The Middle East war is putting pressure on the interconnected global economy, a shock in one part of it can have unexpected and devastating effects in another.
