For the 10th day, war rages between the US and Iran, with its consequences already beginning to be felt. Regarding the economic impacts of the war, it is a fact that the Strait of Hormuz -which Iran threatens to close- constitutes a particularly important strategic transport point for approximately 20 million barrels of crude oil and refined products per day, equivalent to one-fifth of global consumption.
Read: “The world on the brink of a new maritime crisis”, article by Nikos Spanou in Parapolitika
In this context, Iran is trying to inflict economic costs on the US, so they abandon the war, while gasoline prices rise. According to Bloomberg, there is a way to achieve this plan if Saudi Arabia can mitigate the crisis in the oil market.
Strait of Hormuz: Tehran’s goal to stop transport through the waterway
The East-West pipeline, for example, 1,200 kilometers long crossing the Arabian Peninsula from the Persian Gulf to the Red Sea, seems to have been built to respond to this historic moment: the closure of the Strait of Hormuz by Iran. The Saudis built it 45 years ago believing that, one day, Tehran would do what was then unthinkable – stop transport through the narrow waterway.
Saudi Arabia’s pipeline cannot offset the volume of 20 million barrels. However, it can offer a solution for at least 5 million barrels daily. Another pipeline, belonging to the United Arab Emirates, offers another bypass option to the Gulf of Oman for 1.5 million barrels.
What the UAE can do in case of emergency
In case of emergency, the United Arab Emirates can push it close to 2 million barrels. Combined, these pipelines can slow down, or even stop the rapid rise in oil prices, if both countries can move enough tankers to the loading ports where the oil ends up. Right now, about 25 supertankers, each capable of loading about 2 million barrels, have diverted from their original destinations and are heading to the new pickup points. It remains to be seen how the ports will handle these fleets.
The supply loss from the first attacks on Iran was so intense that oil prices shot well above $100 per barrel as soon as the energy market opened Sunday night, posting a 20% gain in seconds. But perhaps the pipeline bypasses will delay further gains, buying time for Trump. The White House continues to bet completely that it can end the war before oil pressure becomes unbearable.
“We calculated that oil prices would rise,” Trump said
“We calculated that oil prices would rise, which happened,” Trump stated. “They will also fall. They will fall very quickly. And we will have gotten rid of a very, very big cancer on the face of the Earth,” he noted.
The strategy appears to have been designed instantly, as the war didn’t go as planned. To succeed, Trump first needs the Saudi-UAE bypass pipelines to make a difference. Second, he must end the war in days rather than weeks – or at least get some supertankers in and out of the Strait of Hormuz within this timeframe. The pipelines are only temporary cushions, nothing more.
Finally, he needs the region’s oil production, refining, and loading facilities to emerge from the war relatively unscathed, allowing rapid resumption of exports. All these are huge bets, now that we know the inadequacy of the arbitrary assumptions Washington made before the war.
On Sunday, state-owned Saudi Aramco was simultaneously loading three very large crude carriers, known as VLCCs in the industry, at the Yanbu and Al Muajjiz terminals in the Red Sea. This is clear evidence that it is diverting as much oil as possible away from the Hormuz route. Adnoc, Abu Dhabi’s state producer, was loading another VLCC in Fujairah, outside the straits. The scale of operations at these three locations is unprecedented.
Can this work? In real terms, adjusted for cumulative inflation effects, oil remains well below previous peaks. The $139 per barrel price reached in March 2022 after Russia’s invasion of Ukraine is about $157 in today’s money. The $147.50 per barrel in July 2008 now equals about $205 per barrel. Additionally, the price impact has been short-lived so far, measured in days rather than months or quarters.
Adjusted for cumulative inflation, the cost of Arab Light crude remains significantly lower than levels that have caused oil crises in the past. For an oil price rise to develop into a full crisis, the price must move higher and stay there for a period. But as days of bombing and counterattacks turn into weeks, continued conflict will begin to hurt the market. Pipeline bypasses buy time, but nothing can replace opening the Strait of Hormuz.
What new risks exist
And there are new risks. Saudi Arabia and the UAE are walking a security tightrope. Diverting oil through bypass pipelines is part of their commitment to maintaining energy market supplies no matter what. But their actions clearly help Washington and may provoke further military retaliation from Tehran. As more tankers head to new loading points outside the Persian Gulf, there is concern among industry officials in Riyadh and Abu Dhabi that pipelines, pumping stations, or even ports will be attacked by drones.
The Sunni Arab states in the Persian Gulf have long had tense relations with Iran, a country with a Shiite majority. Yet in recent years, Riyadh and Abu Dhabi have sought to improve their relations. Before hostilities, Tehran was willing to agree to a diplomatic deal with the US through Oman-mediated talks.
