Beyond Hormuz: Global Oil’s Plan B

The vulnerability of Hormuz

Every day, a quarter of the world's seaborne oil and a fifth of its LNG pass through the Strait of Hormuz. It is the world's lowest-cost oil transit route, but also a shipping chokepoint that can be disrupted at any time. This February, a geopolitical conflict disrupted shipping through the strait and caused sharp movements in international oil prices.

Plan B is under way

Saudi Arabia has pushed the Petroline pipeline, built during the Iran-Iraq conflict in the 1980s, to full capacity. Actual exports from Yanbu rose from 1.3 million barrels per day before the crisis to 3.8-4.65 million barrels per day afterwards.

The UAE has moved just as aggressively. It first left OPEC, then began building a new pipeline to expand capacity to about 3 million barrels per day, with completion planned for 2027.

Iraq is advancing construction of the Basra-Haditha northbound pipeline, with capacity of 2.25-2.50 million barrels per day. Preparations have also resumed for the Iraq-Jordan pipeline to Aqaba, with capacity of 1 million barrels per day.

Even Kuwait, which previously had no alternative route, has begun feasibility discussions.

The crisis is only a catalyst. These routes have long-term value: each crisis brings another increment of capacity to Plan B.

Detours are not cheap

Freight costs rise, voyages take longer and insurance becomes more expensive. After Saudi crude is rerouted through the Red Sea, more than 70% still needs to pass through the volatile Bab el-Mandeb Strait. If that passage is also disrupted, tankers have to sail around the Cape of Good Hope, adding nearly 10,000 kilometres and almost doubling freight and insurance costs.

Why choose a route that costs more and takes longer?

Hormuz is cheap only when it is stable. If passage stops, that low cost ceases to exist. A detour carries a premium, but it can preserve deliveries. During a crisis, a higher price with controllable delivery is preferable to a low price with a constant risk of interruption. The extra freight, time and insurance costs all buy the same thing: greater certainty of supply.

A capacity gap remains

Even as Plan B takes shape, it cannot replace all of Hormuz's capacity. Alternative routes have total nameplate capacity of about 9 million barrels per day, including Saudi domestic use, compared with the 20 million barrels that normally pass through Hormuz each day. The gap exceeds half of normal flows. IEA figures show alternative-route capacity rising from less than 4 million barrels per day before the crisis to about 7.2 million, a net increase of only about 3.3 million barrels per day.

Countries are therefore building pipelines while increasing oil reserves and adjusting production. When alternative routes cannot offset the risk, reserves are used to bridge the gap.

Each crisis brings another round of pipeline expansion. Paying a premium for greater supply-chain certainty is ultimately a contest over pricing power in energy infrastructure. Oil detours increase freight costs, which eventually feed into fuel prices and the prices of energy-related consumer goods.