Gulf Nations Find Workarounds to Keep Oil Flowing Amid War

Gulf nations have successfully implemented alternative routes and utilized spare pipeline capacity to maintain oil flow, largely preventing the feared economic fallout from the closure of the Strait of Hormuz at the onset of the Iran war. While oil prices have risen to around $100 a barrel, they remain manageable and global supply is generally sufficient to meet current demand.

Initially, when Iran threatened to shut down the Strait, which normally accommodates the passage of approximately 15 million barrels of oil daily, Saudi Arabia and other Gulf producers rerouted exports. They employed the East-West pipeline, carrying oil to their Red Sea port of Yanbu, and the United Arab Emirates utilized its pipeline to Fujairah, a route that bypasses the Strait. Both pipelines had available capacity, allowing these nations to sustain exports during the initial weeks of the conflict.

However, these workarounds have faced their own challenges. Iranian-backed Houthi rebels in Yemen declared a blockade of Saudi oil shipments through the Bab el-Mandeb Strait in July, threatening another vital chokepoint. In response, Saudi Arabia diverted Asian shipments northwest to the Mediterranean, utilizing the Suez Canal or a pipeline across Egypt, followed by a lengthy detour around Africa. The situation was further complicated when the East-West pipeline itself was attacked and temporarily shut down in early September, halting oil loading at Yanbu.

Following the pipeline attack, Saudi Arabia and other Gulf producers shifted back to using a U.S.-supervised corridor near the Strait of Hormuz. On Monday, six supertankers loaded 12 million barrels at Saudi terminals on the Persian Gulf. U.S. officials have highlighted the role of this southern corridor in maintaining energy flow, reporting that U.S. forces have assisted in the transit of over 1 billion barrels of oil from Gulf partners in recent months.

Analysts estimate that an average of 6 million barrels of oil per day have been rerouted through this southern corridor, accounting for approximately 40% or more of pre-war flows. Combined with an additional 2 million barrels per day through the Fujairah pipeline, about 8 million of the 15 million barrels per day previously blocked have been restored. The remaining shortfall is being addressed by drawing down global oil inventories and a decrease in demand, estimated at an additional 5 million barrels per day due to higher prices and slower economic growth. Oil from other suppliers, such as the U.S., further balances the market.

Despite these mitigating factors, the alternative routes are expensive and time-consuming. Voyages through the Suez Canal instead of the Red Sea can add up to a month to transit times. The ship-to-ship transfers in the Strait of Hormuz involve tankers waiting at least a day and a half for the operation, leading to dramatically increased charter rates. Spot charter rates for these transfers reached $1 million per day in early September, significantly elevating shipping costs.

Markets remain wary of further disruptions. The vulnerability of pipelines has been demonstrated, and Iran could potentially target the U.S.-guided route in the Strait of Hormuz or the ship-to-ship transfer points off the Omani coast. Any further attacks could necessitate transfers occurring farther from shore, increasing transit times and costs, and potentially impacting global oil prices more severely.