Iran war squeezes the world’s oil escape routes — what happens to Australia if Hormuz and the Red Sea are both threatened?

For six months, the world's energy industry has been trying to solve one enormous problem.

How do you move Middle Eastern oil when the Strait of Hormuz cannot be relied upon?

Saudi Arabia has an obvious answer.

Move more oil west.

Instead of sending crude through the Persian Gulf and then the Strait of Hormuz, Saudi Arabia can transport oil across the country by pipeline and export it from terminals on the Red Sea.

Other Gulf producers have been developing their own alternatives.

The strategy is straightforward: reduce dependence upon one of the world's most vulnerable maritime chokepoints.

But there is now another problem.

The war appears to be following the oil.

Saudi energy facilities on the Red Sea coast have again come under attack.

The Jazan refinery, one of Saudi Arabia's major refining complexes, was hit on Monday. The extent of the latest damage is still being assessed.

At the same time, the Strait of Hormuz remains badly disrupted.

Iran is proposing additional restrictions on shipping.

The United States and Iran have been attacking maritime assets.

Tanker traffic remains severely depressed.

And Brent crude has climbed to a six-week high around US$97 a barrel.

The world's alternative routes around Hormuz are becoming increasingly important.

Now some of those alternatives are themselves being threatened.

For Australia, that represents another evolution of the Middle East energy crisis.

Why Saudi Arabia's Red Sea coast matters

Look at a map and Saudi Arabia's strategic advantage becomes obvious.

The country effectively bridges two energy-export systems.

To the east is the Persian Gulf.

Oil exported from there normally travels through the Strait of Hormuz before reaching the Arabian Sea and international markets.

To the west is the Red Sea.

Saudi Arabia has spent decades developing pipelines and infrastructure allowing crude to travel across the country towards Red Sea export terminals.

That provides an alternative when the Persian Gulf route is threatened.

It has become enormously valuable during the Iran war.

When tanker movements through Hormuz collapsed, Saudi Arabia sought to redirect crude towards the Red Sea.

It was precisely the kind of redundancy a major oil producer needs.

But an alternative route only works if the alternative route is secure.

Jazan has been attacked again

The latest warning comes from Jazan on Saudi Arabia's southwestern Red Sea coast.

The region contains a Saudi Aramco refinery capable of processing approximately 400,000 barrels of crude a day.

It produces petroleum products including petrol and ultra-low-sulphur diesel.

The facility has now been attacked again.

The latest damage is still being assessed.

Earlier attacks had already interrupted operations and shipments from Jazan.

Saudi Aramco has previously said disruptions to its facilities did not have a material overall financial or operational impact and that affected operations could be restored.

That is reassuring.

But the strategic significance of the attacks is larger than the immediate loss of production from one refinery.

The Red Sea is supposed to provide an escape route from the problems surrounding Hormuz.

If infrastructure there also becomes vulnerable, the world's options narrow.

The Houthis have reopened another front

Iran-aligned Houthi forces in Yemen have already demonstrated their ability to threaten Saudi energy infrastructure and Red Sea shipping.

They announced a blockade of Saudi Red Sea ports earlier in the conflict.

Saudi oil installations have subsequently been attacked with missiles and drones.

The Houthis have previously claimed responsibility for attacks against Jazan and other Saudi facilities.

Responsibility for individual attacks should always be established carefully rather than assumed.

But the broader threat is undeniable.

Saudi Arabia now faces potential disruption on both sides of the country.

Hormuz is unstable to the east.

The Red Sea is vulnerable to the west.

That changes the energy equation.

The world has spent months finding ways around Hormuz

This is what makes the latest development particularly important.

The international energy system has adapted remarkably well to the disruption of the Strait of Hormuz.

Alternative oil supplies have been found.

Saudi Arabia has attempted to redirect exports.

The United Arab Emirates has developed routes allowing some oil to reach the Arabian Sea without passing through Hormuz.

Tankers have changed routes.

Some vessels have travelled without normal tracking signals.

Cargoes have been transferred between ships.

LNG exporters have experimented with unusual ship-to-ship transfers.

Governments have increased fuel stocks.

Refiners have searched for alternative crude supplies.

These adaptations help explain why the oil price has remained below levels many analysts feared when the conflict began.

The market has bent.

It has not broken.

But every alternative has limits.

The Red Sea is one of the safety valves

Saudi Arabia's east-west pipeline system allows significant quantities of crude to bypass Hormuz.

Oil can move from fields in eastern Saudi Arabia across the country towards the Red Sea.

From there, tankers can sail through the Red Sea towards the Suez Canal or around Africa.

That makes Saudi Arabia considerably less dependent upon Hormuz than some other Gulf producers.

During a Hormuz crisis, that infrastructure becomes strategically valuable to the entire world.

It effectively acts as an energy safety valve.

Attacks on Saudi Red Sea infrastructure therefore have significance beyond Saudi Arabia.

They potentially reduce the effectiveness of one of the world's principal workarounds for Hormuz disruption.

Not all Gulf oil can simply be rerouted

This is an important point.

There is no switch allowing all the oil that previously travelled through Hormuz to be redirected elsewhere.

Pipeline capacity is finite.

Export terminals have limits.

Refineries have particular requirements.

Different crude grades cannot always be substituted seamlessly.

Tankers have schedules and contractual commitments.

Some Gulf producers have much better alternatives than others.

That means bypass routes can reduce the consequences of Hormuz disruption.

They cannot completely replace Hormuz.

The Strait remains extraordinarily important.

Hormuz itself is still far from normal

Meanwhile, the original problem has not disappeared.

Commercial traffic through the Strait remains substantially below normal levels.

Iran has expanded its restrictions on vessels.

It has blacklisted ships.

It is proposing additional restricted maritime zones.

The United States has been escorting vessels and conducting military operations intended to keep the waterway navigable.

American officials have acknowledged that naval escorts may need to become part of the continuing security arrangement.

That is not normal commercial shipping.

It is commerce operating under military protection.

Oil can still move through such a system.

But moving it becomes more complicated, less predictable and potentially more expensive.

Brent is approaching US$100 again

Markets understand the risk.

Brent crude has climbed to around US$97 a barrel, reaching its highest level in approximately six weeks.

That does not mean US$100 oil is inevitable.

Oil markets can reverse quickly.

A diplomatic breakthrough, sustained improvement in Hormuz traffic or evidence that alternative supplies are sufficient could remove some of the geopolitical risk premium.

But US$100 is again close enough to matter.

And some analysts have modelled substantially higher prices if Middle Eastern exports suffer another major deterioration.

The significance for Australia, however, is not simply whether Brent crosses a psychologically important number.

Australia's vulnerability runs through the entire petroleum supply chain.

Australia buys refined fuel, not merely crude oil

Australia's petrol price does not simply follow Brent.

The ACCC identifies Singapore Mogas 95 as the relevant international benchmark for Australian regular unleaded petrol.

For diesel, the benchmark is Singapore Gasoil 10 ppm.

Those prices are affected by crude oil.

But they are also influenced by refinery availability, shipping, regional supply, insurance, freight and demand.

The Australian dollar matters too because petroleum products are internationally traded in US dollars.

This is why Australian fuel prices can remain elevated even when Brent temporarily falls.

The crude has to be produced.

It has to reach a refinery.

The refinery has to operate.

The finished fuel has to be loaded.

A ship has to carry it.

The ship has to be insured.

And ultimately the product has to reach Australia.

Every stage can acquire a war premium.

Australia is not running out of fuel

There is an important distinction to maintain.

Australia presently has substantial fuel supplies.

The Federal Government's latest update reported 43 days of petrol, 33 days of diesel and 33 days of jet fuel.

There were 36 fuel ships heading towards Australia.

Around 3.5 billion litres were contracted for delivery over the following four weeks.

That contracted volume was higher than the previous week's figure.

There is therefore no basis for suggesting Australia is facing an imminent physical fuel shortage.

The problem is different.

Australia may continue receiving the fuel it needs while paying substantially more to obtain it.

That distinction between availability and affordability has become one of the defining features of this crisis.

Diesel is where the economic consequences multiply

Petrol matters enormously to households.

Diesel matters to almost everything.

Trucks use it.

Farms use it.

Mines use it.

Construction equipment uses it.

Regional businesses use it.

When diesel becomes more expensive, the additional cost enters freight rates.

Freight enters supermarket prices.

It enters building costs.

It affects agriculture.

It affects mining.

It affects virtually every business moving physical goods around Australia.

The economic consequences therefore spread much further than the service station.

Shipping itself is becoming more expensive

There is another layer.

Ships need fuel too.

The Middle East conflict has contributed to tightening international supplies of marine fuel.

Singapore is one of the world's great bunkering centres as well as a crucial refined-fuel hub.

If marine fuel becomes more expensive at the same time that ships face higher insurance and longer or less efficient routes, international freight costs increase.

Australia is particularly exposed because of geography.

We are an island trading nation.

Vehicles arrive by ship.

Machinery arrives by ship.

Electronics arrive by ship.

Clothing arrives by ship.

Industrial inputs arrive by ship.

And much of our refined petroleum arrives by ship.

Higher shipping costs therefore have an unusually direct route into the Australian economy.

Aviation remains exposed too

The same supply system produces aviation fuel.

Australia depends heavily upon aviation because of both its size and its geographic isolation.

International tourism depends on long-haul flights.

Regional communities depend upon aviation.

Businesses depend upon domestic air transport.

Higher jet-fuel costs can therefore affect airlines, passengers, tourism operators and regional economies.

Again, the economic effects of a Middle Eastern conflict can travel much further than the battlefield.

Then comes inflation

Australia has already experienced the inflationary consequences of expensive fuel.

The danger from prolonged Middle Eastern disruption is that higher energy costs become embedded across multiple parts of the economy simultaneously.

Petrol.

Diesel.

Airfares.

Freight.

Shipping.

Food distribution.

Construction.

Mining.

Agriculture.

A short-lived increase can wash through the economy.

A persistent increase is more difficult.

The Reserve Bank does not set interest rates according to the price of Brent crude.

But persistent energy costs can influence inflation.

And persistent inflation influences the environment in which monetary policy decisions are made.

That is how an attack on an oil facility beside the Red Sea can eventually matter to an Australian mortgage holder.

Australia is building greater resilience

The Federal Government has already acknowledged the strategic lesson.

Australia is strengthening its fuel-security arrangements and developing a government-owned fuel reserve.

The broader Fuel Security and Resilience package is designed to increase domestic resilience and reduce vulnerability to international disruption.

That is prudent.

The Iran conflict has demonstrated that energy security is not merely a question of whether enough oil exists somewhere in the world.

The real question is whether it can reach you.

Oil sitting in a Gulf storage tank does little for Australia if ships cannot safely collect it.

A refinery cannot supply Australia if its crude cannot arrive.

A tanker cannot deliver fuel if insurers will not cover the voyage.

Modern energy security is therefore a logistics problem as much as a production problem.

What happens if both routes are threatened?

This is the question governments and energy markets now have to confront.

Hormuz remains impaired.

Saudi Arabia can move some oil west towards the Red Sea.

But the Red Sea is also exposed to military attack.

Other producers can increase production.

But they cannot instantly replace every lost Gulf barrel.

Strategic reserves can be released.

But reserves are finite.

Ships can take longer routes.

But longer routes cost more.

The international system has considerable resilience.

What it does not have is unlimited redundancy.

Every alternative that becomes less reliable increases the value of those that remain.

And that increases prices.

The war is following the oil

There is an uncomfortable strategic logic emerging.

The world responded to Hormuz disruption by finding alternative ways to move energy.

Those alternatives have now become more important.

That also makes them more strategically significant targets.

Saudi Arabia does not want to become a combatant in the US-Iran war.

It has strong reasons to avoid direct confrontation.

But geography does not necessarily allow Gulf states to remain insulated from a conflict occurring around the infrastructure upon which their economies depend.

The same applies to the United Arab Emirates, Qatar and other regional energy producers.

The longer the conflict continues, the greater the danger that what began as a confrontation centred on Iran spreads through the infrastructure that powers the wider Gulf economy.

The Times View

The attack on Saudi energy infrastructure at Jazan is not important merely because another refinery has been hit.

Its importance lies in where it is.

For months, the world has been adapting to the disruption of the Strait of Hormuz.

Saudi Arabia's Red Sea infrastructure is part of that adaptation.

It provides another way of getting energy to international markets.

That makes attacks on the Red Sea side of Saudi Arabia strategically different from another incident inside the Persian Gulf.

The world has spent six months finding ways around Hormuz.

The danger now is that the war is beginning to follow the oil.

For Australia, there is no immediate fuel shortage.

Our stocks remain substantial.

Billions of litres are contracted for delivery.

Ships continue heading towards us.

But security of supply does not guarantee affordability.

If Hormuz remains militarised while the Red Sea alternatives also become less secure, Australia faces a longer and more expensive energy supply chain.

That can mean higher petrol.

Higher diesel.

Higher aviation costs.

Higher shipping costs.

Higher business costs.

And ultimately more inflationary pressure.

The Strait of Hormuz remains one of the world's most important energy chokepoints.

The latest development reminds us why the alternatives matter almost as much.

The world does have ways around Hormuz.

It cannot afford to lose them too.