Iran creates its own Hormuz authority — who now controls the world’s most important oil route?

The Strait of Hormuz is no longer simply open or closed.

Something potentially more consequential is happening.

Iran is attempting to regulate it.

A newly established Iranian body called the Persian Gulf Strait Authority has published rules governing commercial passage through the Strait and warned ships that violations can result in fines, detention or even confiscation.

It has also published a list of vessels it regards as non-compliant.

And the reach of the system potentially extends beyond those ships themselves.

Iran says vessels conducting ship-to-ship transfers or transshipments with listed vessels can also be added to its restricted list. Cargo owners have been instructed to consult the Iranian list before commencing Gulf voyages. Ships seeking removal must formally make their case to Iranian maritime authorities.

That represents another important development in the Iran war.

For months, the argument has been about whether Iran can close the Strait of Hormuz.

The emerging question is different.

Can Iran make itself the gatekeeper?

For Australia, that question matters enormously.

We depend upon international petroleum supply chains and particularly the Asian refineries that supply much of our petrol, diesel and aviation fuel.

If ships moving Gulf petroleum must navigate not only missiles, mines and war-risk insurance but competing American and Iranian systems governing which vessels may trade and transit, the cost and complexity of supplying Asia increase again.

And Australia eventually pays its share.

This follows the Iraqi breakthrough

The development did not appear from nowhere.

Iran recently agreed to allow selected Iraqi oil tankers to pass through Hormuz after discussions between Baghdad and Tehran.

That was significant because it demonstrated that the Strait was not completely impassable.

Ships could move.

But there was an important qualification.

Iran decided which ships could move.

At the time, we argued that this could represent the beginning of a new operating model for Hormuz.

The creation of the Persian Gulf Strait Authority strengthens that possibility.

Iran is now attempting to institutionalise the process.

A regulator requires rules

The new authority is behaving like a maritime regulator.

It maintains a compliance list.

It imposes conditions.

It warns cargo owners.

It provides a mechanism for vessels seeking removal from restrictions.

It threatens penalties.

Those penalties are not trivial.

Iran says non-compliant ships may face fines, detention or confiscation.

That introduces another consideration for every company contemplating a Gulf voyage.

The captain needs to know whether the route is physically safe.

The shipowner needs to know whether the vessel can obtain insurance.

The charterer needs to know whether the cargo can be delivered.

The bank needs to know whether financing the transaction breaches sanctions.

And now everybody may also need to consider whether Iran regards the vessel as compliant.

Commercial complexity is accumulating.

Iran is extending the rules beyond its own list

The ship-to-ship provision is particularly interesting.

Ship-to-ship transfers have become an important mechanism for keeping petroleum moving during the Hormuz crisis.

A vessel can transport crude from a dangerous area and transfer it to another tanker operating outside that zone.

Chinese state shipping companies have increasingly used arrangements outside the Gulf rather than sending their own tankers through the most dangerous chokepoints.

Reuters reported last week that major Chinese state-controlled shipping companies had stopped sending vessels through Hormuz and Bab el-Mandeb and were instead using ship-to-ship transfers around Fujairah and Oman.

Iran's rules potentially reach into that system.

Deal with the wrong ship and your own vessel may become restricted.

That turns compliance into a network.

This could make charterers exceptionally cautious

Imagine running an international shipping company.

A tanker worth tens or hundreds of millions of dollars is an enormously valuable asset.

Its cargo may be worth another enormous sum.

Its crew is your responsibility.

The vessel may already have to comply with sanctions imposed by the United States and other governments.

Now Iran threatens confiscation if it considers the vessel non-compliant.

That creates a difficult commercial equation.

Even if the probability of detention is relatively small, the potential loss is enormous.

Shipping companies therefore price the risk.

Or avoid it altogether.

That is exactly what appears to be happening

Commercial traffic through Hormuz remains extraordinarily depressed.

Reuters reports that fewer than 20 commodity vessels crossed during the entire weekend.

There were 13 crossings on Saturday.

Only four on Sunday.

During the week ending August 21, Kpler recorded 89 commodity vessels exiting the Strait and 103 entering.

That represents activity approximately 90% below pre-conflict levels.

Some vessels may be operating without their normal transponders, meaning publicly visible tracking data is incomplete.

But the overall conclusion is difficult to dispute.

Normal commercial confidence has not returned.

Ships are still being attacked

There is a good reason for that caution.

The United Kingdom Maritime Trade Operations has recorded 23 incidents involving projectile strikes against vessels since July 6, according to Reuters.

So Iran's new administrative arrangements exist alongside an extremely dangerous physical environment.

This is not conventional maritime regulation.

It is regulation being asserted during an armed conflict.

That distinction matters enormously to insurers and shipowners.

Two systems are colliding

There is an even larger problem.

Iran is not operating in a vacuum.

The United States is simultaneously attempting to restrict Iranian trade and enforce its own blockade and sanctions regime.

That means a shipowner can potentially face competing demands.

Washington may say:

Do not trade with particular Iranian entities or cargoes.

Tehran may effectively say:

Do not trade with vessels or organisations we have placed on our own prohibited list.

The commercial operator sits between them.

Complying with one system does not necessarily guarantee compliance with the other.

This is where the story becomes economically important

International trade depends upon predictability.

Businesses can deal with expensive rules.

They can deal with complicated rules.

What becomes particularly difficult is dealing with contradictory rules backed by military power.

A tanker operator has to consider:

Can the ship physically transit?

Will Iran permit it?

Will American authorities permit the transaction?

Will the insurer cover it?

Will the bank finance it?

Will the destination refinery accept it?

Can another vessel safely conduct a ship-to-ship transfer with it?

Every additional uncertainty increases the cost of doing business.

Australia ultimately encounters that cost

Australia is not a passive observer.

Our petroleum system is deeply connected to Asia.

We import large quantities of finished fuel rather than producing everything domestically.

That means Australian fuel security depends partly upon Asian refiners being able to obtain crude economically.

The route can be indirect.

Gulf producer.

Tanker.

Asian refinery.

Another tanker.

Australian terminal.

Service station.

But every step has to work.

And every additional cost incurred along that chain eventually has to be absorbed by somebody.

Australia is still getting its fuel

There is an important piece of good news.

Australia has largely maintained its refined-fuel imports despite the extraordinary disruption across Asia.

Reuters analysis published today finds that Asian imports of light and middle distillates during August are running about 21% below their pre-conflict average.

Poorer economies including Indonesia and the Philippines have experienced particularly severe reductions.

Australia, by contrast, has largely maintained supply.

But there is a catch.

We are paying for it.

Wealth buys security of supply

That distinction deserves attention.

Australia is a wealthy economy.

If fuel becomes scarce internationally, Australian importers can compete for available cargoes.

That helps explain why our service stations continue receiving fuel even while supply into other Asian countries falls.

It is reassuring from a fuel-security perspective.

But markets ration scarce commodities partly through price.

The buyer prepared and able to pay more obtains the product.

That means Australia's successful procurement of fuel does not mean the crisis is economically harmless.

It can mean precisely the opposite.

We are maintaining supply because the market is charging us enough to attract it.

Diesel demonstrates the problem

The Asian gasoil market provides perhaps the clearest example.

Gasoil is closely related to the diesel and jet-fuel products upon which Australia's transport economy depends.

Singapore gasoil refining margins reached approximately US$71.29 a barrel during August, according to Reuters analysis.

That is an extraordinary margin.

It tells us the bottleneck is increasingly not merely crude oil.

It is the ability to transform the right crude into the particular refined products consumers need.

Hormuz can improve without solving that problem

This is an important development in our continuing coverage.

There is disagreement over how much crude is actually moving through Hormuz.

US Energy Secretary Chris Wright has suggested flows are around 15 million barrels a day.

Vessel-tracking estimates cited by Reuters indicate something closer to 5 million barrels a day.

That is an enormous discrepancy.

But the more important conclusion may be that neither figure solves the refined-fuel problem.

Asia needs particular grades of crude.

Refineries need to be operational.

They need sufficient capacity.

They need to produce diesel, petrol and aviation fuel in the proportions the market requires.

A tanker full of crude is not the same thing as a tanker full of diesel.

That distinction matters greatly to Australia

Australia needs finished products.

A farmer does not put crude oil into a tractor.

A truck does not run on Brent.

An aircraft cannot refuel with a barrel of Middle Eastern crude.

Refineries stand between the oilfield and the Australian economy.

That is why refining margins have become one of the most important indicators of our fuel exposure.

And one Australian company illustrates the economics

There is another remarkable Australian development today.

Ampol has reported an almost five-fold increase in first-half underlying profit, with Reuters attributing much of the increase to exceptional refining margins created by Middle Eastern supply disruption.

The company's Lytton refinery margin more than tripled to US$28.26 a barrel.

Underlying net profit after tax reached A$857.2 million.

That does not mean Australian refiners created the international fuel crisis.

They did not.

But it demonstrates how dramatically the economics of refining have changed.

What is painful for fuel buyers can be highly profitable for operating refineries.

Australia's remaining refinery capacity therefore has strategic value

For years, domestic refining was frequently assessed primarily according to cost.

Could Australia import finished fuel more cheaply than refining it here?

That remains an important commercial question.

But the Iran war has introduced another consideration.

What is domestic refining capacity worth during an international fuel shortage?

The answer may be considerably greater than during normal conditions.

A refinery operating inside Australia provides another option.

It does not make us independent—we still need crude and other inputs.

But it provides capability.

And capability has value during disruption.

The same principle applies to fuel reserves

Australia's strategic fuel reserves provide another layer of protection.

Storage does not make fuel cheaper.

It does something different.

It buys time.

If international supply is interrupted, stored fuel allows the economy to continue operating while replacement cargoes are sourced.

The Iran crisis has repeatedly demonstrated the value of time.

Markets eventually find alternatives.

The problem is surviving long enough for those alternatives to arrive.

Iran is trying to make geography political

The Persian Gulf Strait Authority therefore matters for reasons extending beyond maritime bureaucracy.

Iran appears to be attempting to convert geographic advantage into institutional power.

Hormuz is narrow.

Iran sits beside it.

Enormous quantities of energy need to move through it.

That geography cannot easily be changed.

By establishing rules governing passage, Tehran is attempting to turn physical influence into an administrative system.

Whether the international shipping community accepts that system is another matter entirely.

International law will be contested

Other governments are unlikely simply to accept an unrestricted Iranian right to decide which commercial ships can use an internationally important strait.

Questions of freedom of navigation, territorial waters and transit passage will inevitably arise.

But international law and commercial reality do not always move at the same speed during war.

A shipowner may believe it has a legal right to transit.

That provides limited comfort if the vessel faces detention or missile attack.

Commercial decisions are ultimately made according to practical risk as well as legal principle.

The real test will be compliance

The next stage is therefore worth watching closely.

Do major shipping companies consult Iran's prohibited-vessel list?

Do insurers require them to do so?

Do charter contracts begin incorporating Iranian compliance provisions?

Do vessels alter ship-to-ship arrangements to avoid being listed?

Does Iran actually detain a ship for violating its new rules?

If the answer to those questions begins becoming yes, the Persian Gulf Strait Authority will have moved from an Iranian declaration to a functioning component of international petroleum trade.

That would be extremely significant.

Alternatively, the system could fail

Iran can publish whatever rules it chooses.

That does not automatically mean international shipping will recognise them.

Western naval forces may reject Iran's authority.

Shipowners may rely upon military protection.

Other Gulf countries may object.

International organisations may challenge the arrangement.

The United States may impose further sanctions on companies complying with Iranian requirements.

The system could therefore become another source of confrontation rather than a stable new regulatory framework.

Either outcome increases uncertainty

And uncertainty has a price.

That is the recurring economic lesson of the Iran war.

Oil can still exist.

Tankers can still exist.

Refineries can still operate.

Fuel can still reach Australia.

Yet every additional layer of uncertainty makes the system more expensive.

War-risk insurance.

Longer routes.

Ship-to-ship transfers.

Alternative crude.

Strategic inventories.

Legal advice.

Compliance systems.

Military protection.

Now potentially Iranian transit requirements.

None of these costs existed at anything like their present scale before the conflict.

Australia's problem is increasingly affordability rather than availability

This may now be the most important conclusion for Australian readers.

Australia appears capable of obtaining fuel.

Our purchasing power helps.

Our remaining domestic refining capacity helps.

Our strategic reserves help.

The international petroleum industry continues finding solutions.

That makes an imminent nationwide physical shortage less likely.

But the solutions are expensive.

The economic problem therefore moves from:

Can we obtain fuel?

to:

How much must we pay to ensure we obtain it?

That is a much more persistent problem.

Expensive fuel travels through the economy

Diesel affects freight.

Freight affects food.

Diesel affects agriculture.

Diesel affects mining.

Diesel affects construction.

Jet fuel affects aviation.

Petrol affects household disposable income.

Shipping costs affect imports.

Businesses attempt to recover higher costs.

Eventually energy inflation becomes broader inflation.

That is why events in Hormuz matter to the Reserve Bank as well as the service station.

The Strait is becoming something different

Before the war, Hormuz was primarily discussed as a chokepoint.

A narrow geographic passage through which enormous volumes of energy travelled.

During the early months of the war, the question became whether Iran could close it.

Then we saw selective tanker movements.

Then Iraq negotiated passage.

Now Iran has created an authority that purports to regulate which vessels may operate and threatens penalties against those that do not comply.

The evolution is striking.

Chokepoint.

Blockade.

Selective passage.

Regulation.

The next question is whether that regulation acquires international commercial force.

The Times View

Iran has created a Persian Gulf Strait Authority.

It has issued rules.

It has published a list of vessels it considers non-compliant.

It says ships dealing with those vessels can themselves be restricted.

And it warns that violations can result in fines, detention or confiscation.

That is much more consequential than another threat to close Hormuz.

Iran appears to be attempting something more sophisticated.

It is trying to become the gatekeeper.

At the same time, normal commercial shipping remains shattered. Weekend commodity traffic through Hormuz was less than 20 vessels, and activity during the latest measured week remained roughly 90% below pre-war levels.

Australia nevertheless continues obtaining fuel.

That is reassuring.

But Reuters' latest analysis shows why Australians should not confuse supply security with cheap fuel: Asia's refined-fuel imports have fallen sharply, refining margins remain extraordinarily high and wealthier economies such as Australia are maintaining supply partly because they can afford to compete for it.

The argument over Hormuz has therefore changed.

It is no longer simply:

Is the Strait open?

The more important questions are becoming:

Who decides which ships can pass?

Whose rules do they obey?

What happens when American sanctions and Iranian requirements conflict?

And ultimately for Australia:

How much does all of this add to the cost of keeping our fuel supply secure?

The world has repeatedly found ways to keep petroleum moving during this war.

Iran is now attempting to write some of the rules governing that movement.

Whether the world accepts those rules may determine the next stage of the Hormuz crisis—and another part of the price Australians pay for it.