Iran opens Hormuz for Iraqi oil — but a new oil order may be emerging in the Gulf

The Strait of Hormuz is opening.

But not in the way the world has been waiting for.

Iran has granted permission for a number of Iraqi oil tankers to pass through the strategically critical waterway following negotiations between Baghdad and Tehran.

It is potentially good news for international oil supply.

Iraq is one of the world's major petroleum producers. Allowing more Iraqi crude to escape the Gulf could help Asian refineries, increase global supply and eventually relieve some of the extraordinary pressure that has pushed up oil, diesel, aviation fuel and freight costs.

But there is another interpretation.

Iran has not simply reopened the Strait of Hormuz.

It has decided which ships may pass.

That distinction could prove enormously important.

Before the Iran war, Hormuz functioned as one of the great arteries of international commerce. Tankers did not ordinarily require individual political negotiations with Tehran before sailing through it.

The emerging arrangement with Iraq suggests something very different.

Passage may be possible.

But passage may increasingly depend upon politics.

For Australia, which depends heavily upon internationally traded fuel and the Asian refining system, that is both encouraging and concerning.

More oil moving through Hormuz is good.

A Strait whose accessibility depends upon Iran's permission is something else entirely.

Iraq needed a solution

Few countries have more at stake than Iraq.

Before the conflict, Iraq produced approximately 4 million barrels of oil a day, with its economy heavily dependent upon petroleum revenues.

Its geography creates a major vulnerability.

Much of Iraq's oil-export infrastructure ultimately depends upon access through the Persian Gulf and Strait of Hormuz.

When Hormuz stopped functioning normally, Iraq did not merely confront an energy problem.

It confronted a national revenue problem.

Oil sitting inside Iraq cannot finance the government.

It has to reach customers.

Baghdad went to Tehran

Iraq therefore pursued diplomacy.

Following discussions associated with a visit to Iraq by Iranian parliament speaker Mohammad Baqer Qalibaf, Iran granted permission for several Iraqi oil tankers to pass through Hormuz.

Iraqi officials say talks are continuing over facilitating broader oil exports through the Strait.

That represents a potentially important breakthrough.

But consider what has happened.

A sovereign oil producer has effectively negotiated with another country to obtain passage for commercial tankers through one of the world's most important international waterways.

That is not a return to the pre-war system.

It is the emergence of something new.

Iran has demonstrated the value of control

Iran has always understood the strategic importance of Hormuz.

At its narrowest point, the Strait is only about 33 kilometres wide. Before the conflict, roughly a fifth of global oil consumption passed through it, with Saudi Arabia, Iraq, the UAE, Kuwait and Iran among the major exporters relying upon the route.

That geography gives Iran enormous leverage.

Military power matters.

Oil production matters.

Sanctions matter.

But control over access to a chokepoint through which enormous quantities of the world's energy must travel provides another form of power.

The Iraq arrangement demonstrates how that power can be exercised diplomatically as well as militarily.

Oil flows have already collapsed

The scale of the disruption remains extraordinary.

Before the conflict, more than 20 million barrels a day of oil moved through Hormuz.

Current flows are around 8 million barrels a day, according to Reuters reporting on the latest diplomatic developments.

That helps explain the global scramble we have documented during recent months.

Saudi Arabia has sought alternative export routes.

The UAE has relied heavily upon Fujairah.

Iraq is examining alternative pipelines.

China has redirected tankers.

Asian refiners have bought replacement crude from Russia, the United States, Africa and elsewhere.

Shipping costs have surged.

Governments have strengthened fuel reserves.

The world has spent enormous amounts of money learning how to live with a severely impaired Strait of Hormuz.

Now diplomacy provides another route

Iraq's experience introduces another possibility.

Instead of going around Hormuz, negotiate passage through it.

That could be enormously important if other countries follow.

Imagine Iranian agreements allowing particular Saudi, Kuwaiti, Iraqi, Emirati or Asian-bound cargoes through under agreed conditions.

Physical oil flows could increase considerably without the underlying political dispute over control of the Strait being resolved.

That could help oil markets.

But it would also create a very different maritime order.

There is a difference between an open Strait and permitted passage

This distinction is central.

An open international shipping route provides predictability.

A shipowner knows vessels can transit.

An insurer can assess ordinary maritime risk.

A refinery can plan deliveries.

A trader can enter contracts.

A producer can schedule exports.

A tanker captain does not need to wonder whether today's political relationship between two governments changes tomorrow's ability to sail.

Permission-based passage introduces another variable.

Politics.

And markets dislike uncertainty.

Insurance companies will understand the distinction

A tanker successfully travelling through Hormuz is positive.

But insurers will ask why it succeeded.

Was the Strait safe?

Was the vessel protected?

Had its government negotiated permission?

Was the cargo politically acceptable?

Would another tanker receive the same treatment tomorrow?

Those questions matter because insurance is fundamentally the business of pricing uncertainty.

If Hormuz becomes selectively accessible rather than reliably open, war-risk premiums may remain elevated even as more ships begin travelling through it.

That means greater oil supply does not necessarily produce an immediate return to pre-war shipping costs.

Australia needs the oil to move

For Australia, increased passage is nevertheless welcome.

Australia imports most of the refined petroleum it consumes.

Our petrol, diesel and aviation fuel are heavily exposed to Asian refining markets.

Asian refineries require crude.

More Iraqi crude reaching those refineries increases available feedstock.

Greater crude availability should, all else being equal, reduce some of the pressure that has driven Asian refiners to compete aggressively for Russian, American, African and other replacement barrels.

Australia benefits from that.

It could also help India

India has become particularly important to this story.

Chinese demand for replacement crude has intensified competition for Russian oil traditionally purchased by Indian refiners.

If more Iraqi crude can move through Hormuz, additional Middle Eastern supply potentially gives Asian buyers another option.

That could reduce some of the extraordinary reshuffling of global petroleum trade.

Again, the consequence could eventually reach Australia through the regional refined-fuel market.

But Iran itself remains under blockade

There is an extraordinary contradiction.

Iran is allowing Iraqi oil tankers to pass through Hormuz while the United States maintains a naval blockade intended to restrict Iranian oil exports.

Washington says it can maintain that blockade indefinitely. The United States has also said it will protect navigation involving vessels travelling to and from non-Iranian ports.

So two competing systems are effectively operating around the same waterway.

The United States is attempting to determine which Iranian commercial movements are permitted.

Iran is asserting its ability to determine which international vessels may transit Hormuz.

Commercial shipping sits between them.

That is not normality.

It is an armed geopolitical contest conducted around an international trade route.

And Washington is about to increase the pressure

The timing makes Iraq's agreement particularly interesting.

The United States is expected to announce another major package of sanctions against Iran on Monday.

Washington has threatened consequences not merely for Iran but potentially for countries providing Tehran with commercial or financial support.

China is particularly important because it purchases around 80 per cent of Iran's oil exports.

Tehran has responded with threats of severe retaliation.

The diplomatic temperature is therefore rising at precisely the moment Iran is demonstrating that selective commercial accommodation remains possible.

Iran is sending two messages

That apparent contradiction may be deliberate.

To Washington, Iran can demonstrate:

We can still make Hormuz difficult.

To neighbouring Iraq, it can demonstrate:

We can make Hormuz easier.

That turns control of the Strait into negotiating leverage.

Punishment and accommodation can operate simultaneously.

Whether that becomes a durable Iranian strategy remains to be seen.

But Iraq's passage agreement provides evidence of what such a strategy could look like.

Iraq is not relying on Iranian permission alone

Baghdad has also learned the broader lesson of the conflict.

Do not depend upon one route.

Iraq is examining expanded oil exports through Turkey's Ceyhan port and potential future routes towards Syria's Mediterranean coast and Jordan's Aqaba port.

A proposed new pipeline through Syria could eventually carry as much as 2 million barrels a day, although estimates suggest it could cost at least US$15 billion and take around four years to construct.

That will not solve today's problem.

It could fundamentally alter Iraq's exposure to the next Hormuz crisis.

This is what the war is changing

Before the conflict, the cheapest and most efficient route generally won.

Now strategic redundancy matters.

Saudi Arabia values pipelines reaching the Red Sea.

The UAE values Fujairah.

Iraq wants Mediterranean and potentially Red Sea alternatives.

China values alternative crude suppliers.

Australia is building larger fuel reserves.

Every country is learning a version of the same lesson.

Efficiency is valuable until the efficient route disappears.

Then redundancy becomes valuable.

Iraq has even bigger ambitions

Baghdad is simultaneously talking about dramatically increasing oil production.

Iraq's government says it wants production capacity to reach 8 million to 10 million barrels a day within six years, compared with around 4 million barrels a day before the conflict.

Whether Iraq achieves that ambition remains uncertain.

But doubling production capacity would be meaningless without the infrastructure to export the additional crude.

That makes diversification of export routes economically essential, not merely strategically desirable.

The Iran war may therefore reshape Iraq's petroleum infrastructure for decades.

Australia should recognise the same lesson

Australia's circumstances are obviously different.

We are not a Gulf crude exporter.

But our vulnerability comes from dependence upon international refined-fuel supply chains.

The appropriate Australian response follows the same principle.

More strategic reserves.

Multiple suppliers.

Domestic refining capability.

Alternative liquid fuels where economically viable.

Electrification where practical.

Reliable port infrastructure.

Strong relationships with several Asian refining centres.

The objective should not be petroleum independence.

It should be avoiding excessive dependence upon any single point of failure.

Diesel remains the Australian vulnerability

That is especially important for diesel.

Trucks depend upon it.

Farms depend upon it.

Mining depends upon it.

Construction depends upon it.

Regional Australia depends heavily upon it.

Australia can tolerate expensive petrol with considerable economic pain.

A serious diesel shortage would threaten the functioning of the physical economy.

Every additional crude cargo reaching Asian refineries therefore matters.

Aviation benefits too

The same applies to jet fuel.

Australia's geography makes aviation essential.

International tourism, regional communities, business travel and air freight all depend upon reliable supplies.

More crude reaching Asian refineries increases the feedstock available to manufacture those products.

The Iraqi breakthrough is therefore not an abstract Gulf diplomatic event.

It potentially adds supply to the system Australia ultimately depends upon.

Could selective passage reduce oil prices?

Potentially.

If Iraq can move significantly more crude through Hormuz and other Gulf producers obtain similar arrangements, international supply could increase.

Greater supply should relieve some upward pressure on crude prices.

It could also reduce competition for replacement barrels elsewhere.

But the effect will depend upon scale.

Several tankers are symbolically important.

Millions of barrels moving reliably every day would be economically transformative.

That is what markets will watch.

Watch the ships, not the announcements

This has been one of the recurring lessons of the Hormuz crisis.

Diplomatic statements matter.

Physical movements matter more.

The key questions are now measurable.

How many Iraqi tankers actually pass?

How much crude do they carry?

Do they return for additional cargoes?

Are other countries granted similar access?

Do tanker insurance premiums decline?

Does visible commercial traffic begin increasing?

Does Asian crude pricing ease?

Those indicators will tell us whether this is a diplomatic gesture or the beginning of a new operating model.

There is a danger in calling this a reopening

For that reason, describing Hormuz as "reopened" would be premature.

The Strait remains profoundly disrupted.

Iran continues threatening shipping.

The United States continues its blockade.

Major shipping companies remain cautious.

Oil flows remain dramatically below pre-war levels.

What has happened is narrower but potentially more significant.

Iran has demonstrated that it is prepared to permit selected commercial traffic following negotiation.

That is not freedom of navigation.

But it is movement.

After months of near paralysis, movement matters.

It could provide a path towards normalisation

There is also a more optimistic interpretation.

Selective agreements may eventually become the bridge back towards wider commercial passage.

Iraq establishes a mechanism.

Other Gulf states negotiate arrangements.

More vessels transit safely.

Insurers become more comfortable.

Commercial confidence gradually returns.

Eventually the exceptional permissions become ordinary traffic.

Diplomatic breakthroughs often occur incrementally.

The Iraqi arrangement could therefore represent the beginning of something much larger.

We simply do not know yet.

Or it could institutionalise Iranian control

The alternative is considerably less reassuring.

Iran may conclude that selective passage gives it more geopolitical leverage than either fully opening or fully closing the Strait.

Friendly or accommodating countries receive access.

Others face restrictions.

Commercial passage becomes an instrument of foreign policy.

If that model persists, Hormuz remains a permanent geopolitical risk premium embedded in the global oil market.

That would have consequences far beyond the Gulf.

Australia would import that risk premium

Australia cannot control the political architecture of Hormuz.

But if selective access keeps shipping insurance expensive, increases tanker costs or creates uncertainty around Asian refinery supply, we eventually pay part of the bill.

At the fuel pump.

Through freight.

Through airfares.

Through farming costs.

Through mining and construction.

And potentially through inflation.

That is why the precise nature of the Strait's reopening matters.

Not merely whether another tanker gets through.

The Times View

Iran has granted permission for Iraqi oil tankers to pass through the Strait of Hormuz.

That is good news.

After months of severe disruption, every additional tanker carrying Gulf crude towards international customers improves the world's energy position.

Iraq needs to sell its oil.

Asian refiners need crude.

Australia needs the petrol, diesel and aviation fuel those refineries produce.

There is a chain connecting them all.

But we should understand what has actually happened.

Hormuz has not simply reopened.

Iraq negotiated.

Iran agreed.

Tankers were permitted to pass.

That is something fundamentally different from the commercial system that existed before the war.

More than 20 million barrels of oil moved through Hormuz each day before the conflict. Current flows are around 8 million barrels.

The world therefore remains a long way from normality.

The intriguing question is what happens next.

If Iraqi tankers pass safely and other Gulf exporters obtain similar arrangements, oil supply could begin recovering without waiting for a comprehensive US-Iran settlement.

That could eventually help Asian refiners and Australia.

But if passage through one of the world's most important waterways becomes dependent upon Tehran deciding which countries and vessels may use it, a new geopolitical order is emerging around global energy.

There is an enormous difference between an open Strait of Hormuz and a Strait through which Iran permits you to sail.

Tomorrow's oil market — and eventually Australia's fuel bill — may depend upon which of those two systems emerges.