Gulf Nations Navigate Iran War's Oil Flow Amid Mounting Costs

Gulf nations have developed alternative routes to maintain oil exports despite Iran's disruptions to the Strait of Hormuz, but these workarounds are proving increasingly costly and may not be sustainable.

When Iran initially closed the Strait of Hormuz, a critical chokepoint for global oil transport, fears of skyrocketing prices and economic collapse were widespread. However, nearly seven months into the conflict, oil prices remain elevated but not exorbitant, with global supply largely meeting demand. This stability has helped alleviate some economic pressures, though higher prices have created political challenges for leaders like U.S. President Donald Trump.

Saudi Arabia and other Gulf producers quickly turned to unused pipeline capacity. When these routes and subsequent alternatives were targeted by Iran and its allies, oil exporters and the U.S. military implemented further workarounds in a continuous effort to maintain flows. This strategy has kept oil prices around $100 a barrel, diminishing Iran's leverage while its economy suffers under tightened sanctions and a U.S. naval blockade.

Initially, Saudi Arabia rerouted its oil exports via the East-West pipeline to its Red Sea port of Yanbu. From there, tankers traversed the Bab el-Mandeb Strait. Similarly, the United Arab Emirates utilized its pipeline across Oman to Fujairah, bypassing the Strait of Hormuz.

As the conflict progressed, ship operators began using a U.S.-supervised route near Oman, defying Iran's demands. These vessels operated at night with their location systems turned off, transferring oil to waiting tankers outside the strait. This allowed flows from Kuwait, Iraq, and the UAE to resume.

However, disruptions have persisted. Houthi rebels in Yemen declared a blockade of Saudi oil shipments, threatening the Bab el-Mandeb strait. In response, Saudi Arabia redirected Asian shipments to the Mediterranean, utilizing the Suez Canal or a pipeline across Egypt for larger tankers, followed by a lengthy voyage around Africa. The situation further complicated when the East-West pipeline itself was attacked, forcing a shutdown for an indeterminate period.

With loading halted at Yanbu, Saudi Arabia and other Gulf producers returned to sending oil through the U.S.-guided corridor in the Strait of Hormuz. Recent data indicates substantial volumes moving through this route. U.S. officials have highlighted the role of this southern corridor in ensuring energy transit and asserting pressure on Iran.

Analysts estimate that while a significant portion of previously blocked oil has been restored through these alternative routes, approximately 7 million barrels per day are still missing from pre-war flows. This deficit has been offset by drawing down global oil inventories and a decrease in demand, partly due to higher prices and sluggish economic growth in key markets. The balance is further supported by supplies from other producers, such as the U.S.

While the current measures have prevented extreme price surges, the workarounds are costly. Extended voyage times through the Suez Canal and ship-to-ship transfers in the Gulf of Oman significantly increase shipping expenses. Charter rates for supertankers involved in these transfers have surged dramatically, making shipping a substantial portion of the overall cost.

Markets remain braced for further potential disruptions. The vulnerability of pipelines has been demonstrated, and Iran could escalate attacks on the U.S.-monitored routes in the Strait of Hormuz or the transfer zones off the Omani coast. Any further disruption would necessitate even more time-consuming and expensive rerouting strategies.