Following the announcement from the Iranian parliament yesterday that the country will close the Strait of Hormuz, the global shipping industry is preparing for the impacts of the major blockage.
It’s a move that could further escalate the Israel and Iran conflict, with the strait lying between Iran its Gulf Arab neighbours being used to transport about 20 million barrels of oil per day – the equivalent of 20 per cent of global daily oil consumption.
Since 2020, this critical route has transported an average of 14.8 million barrels of crude oil and natural gas liquids per day, as well as 5.5 million barrels of petroleum products and 10.8 billion cubic feet of LNG each day.
The strait’s closure hasn’t taken effect yet as it is yet to be endorsed by Iran’s Supreme National Security Council, but experts say it will potentially create energy crises if it goes ahead.
“Only about 15 per cent of Australia’s crude oil and five per cent of petroleum products are imported from Middle Eastern countries including Saudi Arabia and the United Arab Emirates,” University of Technology Sydney UTS Business School associate professor in operations and supply chain management Sanjoy Paul says.
“However, 30 per cent of Australia’s refined oil effectively transits through the Strait of Hormuz. This is because Australia sources refined oil from the Republic of Korea and Singapore that is refined from crude oil from the Middle East.
“If Australia’s key suppliers are affected by the closure, there could be devastating flow-on effects for the country’s oil supply.”
Since the conflict started, the oil price has increased by 10 per cent, with Paul saying this could lead to further inflations.
“Though Australia does not rely directly on crude oil from the Middle East, its reliance on South Korea and Singapore for refined oil is significant,” Paul says.
“The increased oil price and its impact on the cost of goods and services could also hurt Australia’s fight to control inflation.
“The limited alternative options and reduced capacities of pipelines could potentially disrupt the global oil and LNG supply. If the strait is fully closed, the impacts could be severe, especially for Asian countries which rely on energy from the Middle East.”
RMIT University supply chain expert and founder of Australian Maritime Logistics Research Network Professor Vinh Thai says the closure would “greatly impact global shipping”, oil transportation by tankers and other shipping sectors such as container shipping and freight rates.
“Given that many container ships are still using fuels that are derived from crude oil for their engine, any oil supply disruption resulted from a potential closure of the strait, which accounts for around 20 per cent of global oil transport passage, would lead to a rise in the rise of their ships’ operation costs, and thus the increase in container freight rate to the charterers such as cargo owners,” Thai told ATN.
“This would then lead to the increased total landed costs for the importers and rise in export costs for the exporters.”
Paul says many countries, such as China, have oil reserves that can sustain consumption for up to five years. In the short term, Paul says countries could diversify their sources of oil and gas supply.
“Supply countries should focus on expanding alternative routes such as pipelines connected to alternative ports,” Paul says.
“Most importantly, countries should focus on creating renewable energy sources and speed up their adoption to meet energy needs. In future, renewable energies will be the most viable alternatives to crude oil and LNG amid geopolitical tensions.”
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