“Force Majeure” And Its Economic Impact

By Saraswathi Muniappan

KUALA LUMPUR, March 23 (Bernama) -- “Force majeure” is French for “major force”, and in legal parlance, this means that an extraordinary event has occurred, such as the war in West Asia, which is beyond the control of a party, which excuses them from fulfilling their contract. 

University of Nottingham Malaysia Assistant Professor of Business Economics Dr Tan Chee Meng explained that companies with contract obligations can invoke force majeure not only during war but also in the context of armed conflicts, natural disasters, strikes, and government restrictions.

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“It is used as a safeguard to protect parties caught up in a war or conflict,” he told Bernama when asked about the use of force majeure and its impact on economies, especially in Asia.

The military attack by the US and Israel on Iran started on Feb 28. Tehran has retaliated against the American attacks by bombing US military airbases and refineries in 11 countries in the Gulf region over the past 24 days.

At the time of writing, Iraq has invoked force majeure on all foreign oil fields developed by foreign oil companies; Kuwait on crude oil and refined oil products; Qatar on gas exports or liquified natural gas (LNG) shipments, as well as the Bahrain state-owned energy company (BAPCO).

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BAPCO declared force majeure regarding it operations after an attack on its refinery facilities.

In Iraq, for example, the oil fields are owned by the state, while foreign operators produce oil under contract with the Iraqi government. 

“Despite the war, these foreign entities still have a contractual obligation to produce oil despite an inability to transport oil safely out of the Middle East and limited space for oil storage.”

“This is likely the reason why Iraq called for the force majeure, which would provide a legal basis for foreign firms to stop oil production as long as the war continues and export and storage abilities remain limited,” he explained.

Tan said the natural impact of such a move is a production cut. 

“As the war in Iran continues and oil and gas have difficulty moving in and out of the Straits of Hormuz, obligating operators to produce oil and gas at pre-war levels is unrealistic and likely wasteful since there isn’t adequate storage,” he said.

Is Force Majeure The Reason For Spike In Insurance Premiums, Shortages?

Tan views that the hike in insurance premiums is not due to “force majeure” but rather to disruptions caused by the blockade at the Strait of Hormuz, the world’s most critical oil transit chokepoint, over which Iran has significant influence.

The strait links the Persian Gulf to the Gulf of Oman and the Arabian Sea, where about 20-30 per cent of global seaborne oil trade passes daily.

“As the risk of traversing the straits has risen substantially throughout the war, insurance companies are charging higher premiums, narrowing coverage, and imposing higher deductibles, which is the portion of the claim absorbed by the insured,” he said.

For example, Tan said that assuming a US$500,000 cargo (US$1 = RM3.93) is insured with a deductible of US$5,000. If the cargo sustains US$50,000 in damage, the insurance firm will only pay US$45,000 in compensation, with the remaining US$5,000 borne by the insured.

However, with the heightened risk, this ratio changes drastically to the point where it is no longer economically viable for both the shipper and insurance firms, he said.

However, Tan said this is not the primary reason many countries around the world are facing oil and gas shortages; rather, the blockade of the Straits of Hormuz is the main issue.

Force majeure, in this context, is a response to disruption and provides a legal basis for oil firms to cut production due to their inability to export safely across the straits and to storage limitations.

As the blockade continues, oil and gas shipments in and out of the straits have decreased dramatically.

Tan cited Reuters estimates showing that shipments dropped from around 25.1 million barrels per day (bpd) to 9.7 million bpd.

Unfortunately, over 80 per cent of oil and gas leaving the Middle East is destined for Asia.

“Without these fossil fuels, many Asian countries now face energy and fuel shortages, especially less developed nations that lack the capacity to maintain large reserves,” he said.

Countries like Bangladesh, Vietnam, and Thailand announced remote work and the use of public transport as fuel-saving measures. Others, especially oil-consuming countries, have increased pump prices.

A prolonged situation will see more governments forced to resort to extreme measures to manage energy consumption. 

Maybank Investment Bank Bhd (Maybank IB) said it has trimmed its ASEAN-6 Gross Domestic Product (GDP) growth forecast to 4.5 per cent in 2026 from 4.8 per cent and 4.7 per cent in 2027 (from 4.8 per cent). 

For Malaysia it revised the GDP forecast for 2026 to 4.9 per cent from 5.1 per cent, Indonesia to 5.2 per cent (5 per cent), the Philippines to 4.9 per cent (4.6 per cent), Singapore to 3.6 per cent (3.4 per cent), Thailand to 2.1 per cent (1.8 per cent), and Vietnam to 7.6 per cent (7.2 per cent).

The larger cuts are in the Philippines (0.4 per cent), Vietnam (0.4 per cent), and Thailand (0.3 per cent).

Maybank IB said higher energy prices and fuel subsidies will add to the fiscal burdens of Indonesia, Thailand and Malaysia.

“Indonesia’s three per cent fiscal deficit ceiling may be tested if the oil shock is protracted. Malaysia (net energy exporter) and Singapore (large fiscal reserves) are in a better position to weather the fallout,” said the bank.

Maybank IB also raised the ASEAN-6 inflation forecast to 2.7 per cent in 2026 (from 2.2 per cent) and 2.7 per cent in 2027 (from 2.5 per cent), with higher adjustments for Thailand (0.8 per cent in 2026), the Philippines (0.5 per cent) and Indonesia (0.5 per cent). 

“The energy price shock has short-circuited the monetary easing cycle. We expect the central banks in the Philippines and Singapore to hike by 25 basis points and tighten, respectively, via a steeper appreciation bias in April.

“Other ASEAN central banks will likely remain on hold in 2026,” it added.

-- BERNAMA