Oil and gas exports from the Gulf are facing fresh disruption as the war between the US and Iran intensifies. Control over the Strait of Hormuz is important for both countries.
In the past months, Iran has shown it can control the strait or at least disrupt it, said Guntram Wolff, a senior fellow at the Bruegel think tank and economics professor at the Free University in Brussels.
“Several months of bombing campaigns have not diminished Iran’s ability to control the Strait of Hormuz,” Wolff said, challenging the US to regain the upper hand.
This week, traffic in the strait again came to a near halt as Iran attacked tankers and fired drones and missiles at military facilities in Bahrain, Kuwait and Jordan.
The US launched more attacks on Iran and resumed a naval blockade of its ports. It also revoked sanctions waivers that had allowed Iran to openly sell its oil, providing much-needed funding.
Before the war, 20% of the world’s oil and gas flowed through Hormuz.
Before the war broke out on February 28, the Strait of Hormuz was a toll-free international waterway and the gateway to about 20% of global liquefied natural gas (LNG), according to the International Energy Agency.
Additionally, about 20% of the world’s oil was transported via waterways from the Persian Gulf to the Arabian Sea and beyond. The lion’s share went to Asia.
For the past few years, this has meant an average of about 20 million barrels a day, according to the U.S. Energy Information Administration.
Flows through the Strait of Hormuz fell to about 14.6 million barrels per day in the first quarter and have fallen sharply since the conflict escalated.
The initial US-Iran ceasefire agreement signed on June 17 provided some relief for shipping but is no longer in effect. In the past weeks, US forces have attacked hundreds of Iranian military targets.
Analysts warned that further attacks on Iran could lead to retaliation against the Gulf’s oil and gas infrastructure, including refineries, ports and pipelines, leading to a costly war and oil shortages for the entire region.
“The limited progress achieved since the June ceasefire has now effectively been exposed,” Greek maritime risk-management firm MARISKS warned after tensions escalated in the region. “The potential for further progress is very high.”
Oil and gas producers are looking for alternatives
At the beginning of the war, there were reports that Iran was charging $2 million (€1.7 million) by ship to use the waterway. Recently, they have demanded that ships use the northern route through Iranian waters.
At the same time, the US Navy is diverting ships through the southern route which hugs the coasts of Oman on the opposite side of the strait.
Currently, Iran, Iraq, Kuwait, Qatar and Bahrain depend on the Strait of Hormuz for most of their oil exports.
Although shipping is the cheapest way to move oil, ships are stuck in the middle of a tug of war in the strait, and oil and gas producers are looking for alternatives.
Some, such as Saudi Arabia (East-West Pipeline/Petroline) and the United Arab Emirates (Abu Dhabi Crude Oil Pipeline) already have export routes that avoid the strait. But according to the International Energy Agency, these pipelines can only divert a maximum of 8.8 million barrels of oil a day.
New routes, new risks for Gulf oil exporters
Since existing pipelines cannot replace normal Hormuz volumes, expanding new pipeline capacity is one of their only options. Yet such projects take years and billions of dollars. And if they move toward the Red Sea, they too may no longer be safe as the conflict escalates beyond the Strait of Hormuz.
Saudi Arabia’s East-West Pipeline connects Abqaiq on the eastern Gulf coast to Yanbu port on the Red Sea.
But to reach the Arabian Sea and Asian markets, tankers leaving Yanbu must pass through the Bab al-Mandeb Strait, another narrow waterway where Yemen-based Iran-backed Houthis could attack.
Besides causing problems for those ships, it could open a second front in the war and force other ships headed for the Suez Canal to detour around the southern tip of Africa.
Still, the United Arab Emirates (UAE), which avoids the Strait of Hormuz and the Red Sea, is doubling down on options and wants to expand existing infrastructure and build a new port and container terminal on its east coast, according to multiple reports.
Several other pipelines are either operational or under development in Iraq, Jordan, Kuwait and Türkiye. However, their capability is modest, and they cannot compensate for any major disruption in the Strait of Hormuz.
For Iran, it feels like all or nothing
Pointing to Saudi Arabia’s East-West Pipeline and the United Arab Emirates’ Abu Dhabi crude oil pipeline, MARISKS warned that Iran’s direct threat against the Gulf’s alternative oil export infrastructure is “perhaps the most significant development” in the current situation.
“Iran’s message is equally clear: Either all regional energy producers can export, or none do.”
No matter what happens next, Iran has shown that it is prepared to increase the economic costs of any attack on its country by threatening global energy supplies through a blockade of vital waterways or by attacking other Gulf oil and gas infrastructure in retaliation.
Edited by: Andreas Becker