Hormuz approaches standstill: Australia’s fuel supply chain enters a more dangerous phase

The Strait of Hormuz has been disrupted for months.

Now it is approaching something considerably more serious.

A near standstill.

Shipping data reported by Reuters shows that only two vessels passed through the Strait of Hormuz on Friday, with another LPG tanker entering the Gulf.

Most significantly, no crude-oil shipments were visible passing through the strait on Friday.

Before the Iran war, more than 130 ships traversed this narrow waterway every day.

The comparison is extraordinary.

Five vessels crossed on Wednesday.

Nine crossed on Thursday.

By Friday, observable commercial traffic had almost disappeared.

Some vessels may be moving without transmitting tracking signals, so the numbers cannot provide a perfect count.

But the direction is unmistakable.

One of the most important energy corridors in the world is barely functioning.

For Australia, this marks another escalation in an energy crisis that has already affected fuel prices, inflation, government revenue and business costs.

The danger is no longer simply that oil becomes more expensive.

The greater danger is that the international system supplying the crude from which Australia's petrol, diesel and jet fuel are ultimately produced becomes increasingly distorted.

Two more ships attacked

The collapse in traffic follows another escalation in attacks on commercial vessels.

The United Arab Emirates says two vessels operated by Abu Dhabi National Oil Company were attacked while passing through Hormuz on Thursday evening.

No injuries were reported.

Iran had not immediately commented on the UAE allegation when Reuters reported the incident.

But for shipping companies, the political argument over responsibility is secondary to the commercial reality.

Ships are being attacked.

Owners have crews to protect.

Cargoes have to be insured.

Tankers are enormously valuable assets.

Insurers have to price the possibility of loss.

Customers have to decide whether waiting for a cargo is worth the risk.

Eventually, commercial operators respond.

Friday's shipping numbers suggest many already have.

Iran has enormous leverage

The reason Hormuz matters so much is geography.

The Persian Gulf contains some of the world's most important petroleum producers.

The Strait of Hormuz is the narrow maritime exit connecting those producers with the Arabian Sea and international markets.

Before the war, roughly one-fifth of global oil and LNG flows passed through the strait.

Iran therefore possesses something extraordinarily valuable during negotiations.

Geographic leverage.

Restricting passage imposes economic costs not simply upon the United States but upon energy consumers around the world.

Asia is particularly exposed.

And that is where the Australian connection becomes important.

Australia is downstream of Asia

Australia does not need to import large quantities of Iranian crude directly to be affected by Iran.

Much of Australia's petrol, diesel and aviation fuel comes from Asian refining centres.

Those refineries require crude oil.

Historically, the Middle East has supplied more than half of Asia's crude imports.

If Gulf supplies cannot move normally through Hormuz, Asian refiners have to find oil elsewhere.

That is precisely what is now happening.

The Australian fuel supply chain therefore extends considerably further than the tanker arriving at an Australian port.

It begins with the crude oil feeding the refinery that produced the fuel.

Asian refiners are scrambling for replacement oil

The market is adapting.

Asian refiners are increasingly purchasing crude from the United States and West Africa.

US crude exports to Asia reached a record 2.35 million barrels per day in July.

South Korea's GS Caltex recently purchased two million barrels of US Mars crude at a premium of approximately US$13 to US$14 a barrel over the October Dubai benchmark.

Japanese refiners have also bought US crude at substantial premiums, while Taiwan's CPC has purchased additional American and West African supplies.

That is good news in one respect.

Oil is available elsewhere.

The world is adapting.

But adaptation is not free.

The replacement barrel has to travel further

Consider the difference.

A refinery in Asia accustomed to obtaining crude from the Middle East suddenly has to buy oil from the United States or West Africa.

The voyage can be longer.

Shipping capacity is required.

Freight costs matter.

Insurance matters.

The crude itself may attract a premium because other refiners are competing for the same replacement supplies.

Refineries also have technical requirements concerning the types of crude they can process efficiently.

Replacing one barrel with another is not always as simple as redirecting a tanker.

The oil may still arrive.

But it can arrive at a substantially higher cost.

Australia is downstream of that bill

This is the part Australians should understand.

If an Asian refinery has to pay more for crude, more to transport it and more to secure reliable supply, those costs become part of the economics of producing petrol, diesel and jet fuel.

Australia then purchases those refined products from the international market.

That does not mean every additional dollar automatically appears at an Australian petrol station.

Currencies matter.

Competition matters.

Refining margins matter.

Wholesale markets matter.

Taxes matter.

But Australia cannot permanently purchase refined petroleum below the economics of the international market supplying it.

Eventually the international cost matters here.

Brent alone no longer tells us enough

Brent crude rose on Friday, reaching about US$88.52 a barrel during trading as tanker attacks and stalled peace negotiations renewed concerns about supply.

It was heading for a weekly gain of around 6 per cent.

But there is a danger in concentrating exclusively on Brent.

A crude benchmark can appear relatively stable while physical fuel markets are under considerably greater pressure.

Australia ultimately needs usable products.

Diesel.

Petrol.

Jet fuel.

The cost of obtaining and refining replacement crude therefore matters alongside the headline oil price.

Diesel remains Australia's critical exposure

Petrol dominates political discussion because millions of motorists purchase it.

Diesel is arguably more important to the functioning of the Australian economy.

Trucks need it.

Farms need it.

Mines need it.

Construction equipment needs it.

Commercial vehicles need it.

Regional industries need it.

A sustained increase in diesel costs travels through the economy.

The consumer who never purchases diesel personally can still pay for it in the price of food, building materials, deliveries and countless other goods.

Jet fuel matters for an island continent

Aviation creates another vulnerability.

Australia is separated by enormous distances internally and externally.

International tourism depends on aircraft.

Regional communities depend on aircraft.

Business travel depends on aircraft.

Air freight depends on aircraft.

Aircraft depend overwhelmingly upon aviation fuel.

Australia can electrify cars and increase renewable electricity generation.

There is currently no practical large-scale electric substitute for the fuel required to fly a wide-body passenger aircraft from Australia to Europe, North America or Asia.

Jet-fuel security therefore remains an economic necessity.

The shipping risk itself has a price

There is another component that can be overlooked.

Insurance.

Commercial shipping operates on risk.

When a waterway becomes dangerous, insurers respond.

War-risk premiums can increase.

Shipowners may demand greater compensation.

Some operators avoid the area entirely.

Crews may be reluctant to transit.

Cargo owners may seek alternative routes.

The eventual cost of a barrel of oil therefore includes more than the petroleum itself.

It includes the cost of safely moving it.

A waterway in which commercial ships are repeatedly attacked is inherently more expensive to use.

The United States says its blockade can continue indefinitely

The diplomatic outlook provides little immediate reassurance.

US Defense Secretary Pete Hegseth has said the United States has the capacity to maintain its naval blockade of Iranian ports indefinitely.

Iran, meanwhile, continues to use control of Hormuz as leverage.

Reuters reports that there has been no progress in talks building upon the June agreement that previously attempted to end the war.

That raises an uncomfortable possibility.

The international energy system may need to adapt not to a disruption lasting days, but to an abnormal trading environment lasting considerably longer.

Temporary disruption and structural disruption are different

Businesses can manage temporary problems.

Inventory provides time.

Contracts provide protection.

Governments can release reserves.

Companies can absorb costs.

Consumers can tolerate temporary increases.

But the longer disruption persists, the more the system changes.

Refiners sign new supply arrangements.

Tankers move to different routes.

Businesses change prices.

Airlines alter fuel assumptions.

Freight companies adjust surcharges.

Governments change energy-security policy.

What began as an emergency eventually becomes part of the economic environment.

That is the point at which Australia's exposure becomes more serious.

Australia has already recognised the danger

The Australian Government has already moved to strengthen fuel security during the crisis.

Australia has been operating under heightened fuel-security arrangements, while the Commonwealth has announced plans for a $3.2 billion Australian Fuel Security Reserve, including measures intended to increase diesel and jet-fuel resilience.

That policy response reflects an important reality.

Australia is a major energy producer but remains heavily dependent upon imported refined petroleum.

Coal and LNG exports do not put diesel into a truck.

They do not put jet fuel into an aircraft.

Australia needs actual petroleum products in Australian storage and distribution systems.

The inflation risk has not disappeared

This also returns us to inflation.

The transmission mechanism is straightforward.

Replacement crude costs more.

Refining costs increase.

Diesel becomes more expensive.

Freight becomes more expensive.

Businesses face higher costs.

Some absorb them.

Others pass them through.

Prices rise.

If the process continues long enough, an international energy shock becomes broader domestic inflation.

The Reserve Bank cannot reopen Hormuz.

But it cannot ignore Australian inflation either.

That is why an apparently distant shipping crisis can eventually influence Australian mortgages and business borrowing.

There is a strange paradox

The world is simultaneously demonstrating extraordinary resilience and extraordinary vulnerability.

The resilience is obvious.

Despite months of disruption at one of the world's most important energy corridors, the global economy continues functioning.

Alternative crude is being found.

US exports to Asia have surged.

West African oil is moving east.

Refiners are adapting.

Governments are using strategic reserves.

That is impressive.

But the vulnerability is equally obvious.

All of that adaptation is necessary because a narrow stretch of water between Iran and Oman has become almost unusable for normal commercial energy trade.

Modern globalisation can reroute supply.

It cannot abolish geography.

Australia should watch ships, not simply oil prices

For Australians following the crisis, perhaps the most useful indicator now is not Brent.

It is shipping traffic.

How many tankers are actually moving through Hormuz?

How much crude is reaching Asian refineries?

How much replacement oil is being purchased elsewhere?

What premiums are refiners paying?

What is happening to diesel and jet-fuel prices?

Those questions increasingly tell us more about Australia's exposure than a single international crude benchmark.

What would constitute improvement?

The answer is not another announcement of negotiations.

Markets have heard many of those.

Meaningful improvement would be visible.

Ships moving safely through Hormuz.

Tanker traffic increasing substantially.

Crude exports recovering.

War-risk premiums declining.

Asian refiners reducing emergency purchases from distant suppliers.

Diesel and jet-fuel markets normalising.

Inventories rebuilding.

Those would be signs that the physical energy system is recovering.

Until then, Australia should remain cautious about declaring the fuel crisis over.

The Times View

The Strait of Hormuz has moved from severe disruption towards something approaching commercial paralysis.

On Friday, ship-tracking data identified only two vessels actually crossing the strait and no visible crude-oil shipments.

Before the war, more than 130 vessels passed through every day.

The world is responding remarkably effectively.

Asian refiners are buying American and West African crude.

Alternative supply chains are being constructed.

Fuel continues reaching consumers.

But there is a price for that resilience.

Replacement oil is travelling further.

Some refiners are paying substantial premiums.

Shipping risk has increased.

Refined-fuel markets remain under pressure.

Australia sits downstream of all of it.

Our petrol, diesel and aviation fuel does not become immune to the Iran war simply because the crude was eventually sourced from Texas rather than the Persian Gulf.

The question is no longer whether the global energy system can work around Hormuz. It clearly can.

The question is how long it can do so, and at what cost.

For Australia, that difference may eventually be measured not simply at the petrol pump, but in freight, food, aviation, construction, inflation and interest rates.

The Strait of Hormuz is thousands of kilometres away.

Its near closure is getting economically closer to Australia every day.