Global Oil’s Plan B: Who Pays for Bypassing Hormuz?

Last time, we looked at alternatives to Hormuz. Now, what does the detour cost?

When tensions rise around Hormuz, tankers have to change course. Detours are not free: every nautical mile has a price. Today, we break down the bill.

Three parts of the bill: freight, insurance and time

First, freight. Tanker daily charter rates normally run at about $30,000. At their peak this March, they reached $420,000, with an index record of $424,000 and some actual fixtures exceeding $510,000. Rates rose by a factor of 5 to 14.

Second, insurance. For a tanker worth $100 million, war-risk premiums rose from $250,000 to a peak of $7.5 million per voyage. Rates increased from about 0.25% to a commonly quoted 1%-3%, with extreme quotes reaching 7.5%: a rise of 5 to 30 times. Some insurers temporarily stopped offering cover in the Persian Gulf.

Third, time. From the Persian Gulf to Europe, the Suez route takes about 19 days. Going around the Cape of Good Hope takes nearly 35 days, adding 16 days and about 4,600 nautical miles, or 8,500 kilometres.

Those extra 16 days are not just a delay. Oil in transit ties up capital, and buyers need to hold more inventory. These are hidden costs within the bill.

Who pays?

When all three costs multiply, whose pocket does the money come from?

Shipowners benefit first: higher freight rates raise their profits.

Cargo owners advance the money, putting pressure on traders' cash flow.

The cost eventually reaches consumers. Freight acts as a hidden tax, and the people buying fuel ultimately pay for the detour.

Geopolitical tensions have been rising again. Foreign media reports suggest Iranian oil exports may face disruption, which would increase the need for detours and make the bill larger.

How does it reach your fuel bill?

Consider the calculation: landed costs increase by about $0.5-$3 per barrel, typically $1-$2.

An extra $1 per barrel works out at roughly RMB0.05 per litre, using 159 litres per barrel and an exchange rate of about 7. A 50-litre tank of fuel would cost RMB2-RMB8 more.

That may sound small, but it is the crude-oil component. The retail effect is also diluted: a RMB1 increase in crude costs does not become a RMB1 increase at the petrol station. Inventory and competition absorb part of the change.

For the full chain from crude prices to fuel prices and consumer prices, see the earlier article, “Crude Oil Rises 10%: Why Do Supermarket Prices Rise Only 1%?”

What should we watch next?

Three signals:

The BDTI tanker freight index: an increase means freight costs are still rising.

War-risk premium quotes: their direction reflects the market's pricing of risk.

Regional oil-price differentials, Europe versus Asia: a widening gap means detour costs are appearing differently across regions.

Plan B answers whether oil can arrive. It does not answer how much delivery will cost. Reliability has a price, and that price is ultimately shared by everyone.