Why little was done to develop an alternative to the Strait of Hormuz

By Rebecca F Elliott & Vivian Nereim

 

Of all the risks the global energy system has long faced, none was bigger or better known than the potential closure of the Strait of Hormuz.

 

The narrow passageway out of the Persian Gulf is both vital — serving as the only gateway to the rest of the world for huge amounts of oil and natural gas — and extremely vulnerable to attacks.

 

But despite being widely recognised as a potential choke point, the strait remains the only way to export most of the energy produced in the region. That has come into sharp relief in the second week of the war in the West Asia, as the near-closure of the waterway sent oil prices soaring above $100 a barrel for the first time in almost four years. For many other energy-producing countries in the region, the only way to avoid the strait would be to lay a pipeline across a neighboring country — an expensive and politically fraught endeavor. Plus, any pipeline would itself be vulnerable to Iranian attacks.

 

 

“There always has been the nightmare scenario, but it seemed to be a scenario that was not very likely,” said Daniel Yergin, a Pulitzer Prize-winning energy historian and vice chairman of the research firm S&P Global. “The diversification or security came from the fact that the consumers would be there to protect the oil.”

 

While President Trump has floated the possibility of providing US naval escorts for oil and gas tankers, he has not followed through, so far. With Iran attacking vessels and refineries, oil shipments through the Strait of Hormuz have fallen to less than 10 percent of their prewar levels, according to the International Energy Agency. Some countries are putting more fuel in storage tanks, but those are running out of room.

 

That is forcing countries to cut back. Within little more than a week, oil production fell by several millions of barrels a day, according to estimates from the research firm Rystad Energy.

 

“It doesn’t matter where the price of oil gets. If you can’t sell any oil, you might as well keep it under the ground,” said Shwan Ibrahim Taha, chairman of the Iraqi bank Rabee Securities.

 

GCC leaders have talked about building a unified passenger and freight rail system for more than a decade to little avail. Building a shared system for exporting energy would be substantially more fraught, and unlikely to surmount political and economic hurdles.

 

More than a quarter of the oil typically exported via the Strait of Hormuz in the form of either crude or fuels like diesel is still able to get out, the IEA estimated. That is because the Emirates built a short pipeline from Abu Dhabi to Fujairah that started operating in 2012, circumventing the Strait of Hormuz, though Iran has targeted facilities on both ends.

 

The biggest alternative is Saudi Arabia’s conduit to the Red Sea, which opened in the 1980s during what came to be known as the “tanker wars” between Iran and Iraq. The pipeline can carry up to seven million barrels of oil a day. But with two million barrels headed to refineries within the kingdom, only about five million barrels a day of capacity is available to oil that otherwise would be shipped through the strait, Amin H Nasser, chief executive of Saudi Aramco, said this week. 

 

“Immediately, as the Strait of Hormuz starts closing, we ramped up production through the East-West pipeline,” he said. Nasser separately warned that global oil markets would face “catastrophic consequences” without access to the strait. Iran has also managed to move some oil through the strait on tankers, frustrating Emirati officials. Iran has also managed to move some oil through the strait on tankers, frustrating Emirati officials. Even if the war ends with a severely weakened Iran, insurgents could emerge to attack shipping through the strait, putting the lives of sailors and valuable ships and cargo at risk.