Strategists long viewed the closure of the Strait of Hormuz as a low-probability event — much like that of the United States’ launching a war against Iran. Since combat ensued, we’ve seen energy prices climb and stock markets vacillate as nations such as India deal with cooking gas shortages, Americans reacquaint themselves with $4-a-gallon gasoline and the Federal Reserve wrestles with the prospect of resilient inflation.
Iran’s ability to effectively shutter oil’s most critical waterway has exposed a huge supply chain vulnerability, one that will have to be remedied by diversification in the production of oil and gas as well as the means and methods to transport them.
Notably, this is the third major supply chain disruption induced by global events in the last six years: first Covid, then the Russian invasion of Ukraine in 2022 and now the war in the Middle East. Although each was different, they all carried significant implications for energy, food and other goods, highlighting how intensely interconnected markets are.
Markets always find a way to deal with constraints — usually by settling at a much different, as in higher, price. In the near term, a full reopening of the strait is the simplest and most direct way to restore market balance. The Iranians, though, aren’t very interested in playing at the moment.
The strangling of the strait by a single government actor is forcing a huge rethink about the global energy distribution network. Right now, that means an “everything but the kitchen sink” approach.
We have seen a combination of tools being used or considered — releasing strategic oil stocks, reflagging vessels or allowing vessels to pass by agreement with Iran, government-backed insurance, naval escorts and military threats. We are also seeing expanded use of existing alternative routes that bypass the strait, such as the East-West pipeline across the Arabian Peninsula to the Red Sea.
That combination won’t be enough to break Iran’s grip on 20 percent of the world’s oil. The East-West pipeline is a starting point for how the future may unfold. It is a 750-mile system that allows oil and oil products to be moved across the Arabian Peninsula from the Eastern Province, where it can feed refineries and industrial activity, or be loaded for export at the Red Sea Port of Yanbu. Built in the early 1980s with an initial design capacity of about five million barrels per day — although it was reportedly flexed to seven million barrels in 2019 — the pipeline provides insurance against an inability to export through the strait.
The lesson here is that insurance in the form of an expanded supply chain is rapidly shaping future development. Once the Iran conflict is behind us, there has to be a careful examination of investments needed to make supply chains more diversified and resilient, including the development of export alternatives to the strait.
For the Saudis, this could include an expansion at the Port of Yanbu to support greater output and loading, as well as revisiting now-closed routes such as the Trans-Arabian Pipeline corridor. Iraq has begun exporting oil north via the Kirkuk-Ceyhan pipeline route; the United Arab Emirates has used the Habshan-Fujairah pipeline route since Baghdad and the Kurdistan Regional Government reached an agreement.
Not one of these is a perfect substitute for running tankers through the Strait of Hormuz, but Iran’s strategic advantage and the looming global oil shortages now make the expansion of these routes an urgent matter of political will, investment and commercial viability.
In practice, this means expanding production in frontier plays in Guyana and Suriname (located east of Venezuela), Argentina and Brazil. While these South American countries have historically endured cycles of nationalization and privatization, which carry their own risks for investors, they are less exposed to the type of geopolitical calamity we are witnessing in the Persian Gulf. Moreover, the nature of the production — highly complex offshore rigs or short-cycle shale — renders it less exposed to government takeover.
Other regions will also come into sharper focus, including Russia, the Arctic, Africa and North America.
Russia remains one of the world’s largest holders of oil and gas resources, but Western oil companies are unlikely to want Vladimir Putin as a partner. That’s not true of China, one of the world’s largest oil consumers, which will most likely expand its relationship with Russia to guarantee access to supply. Whoever the buyer, keeping oil flowing matters in a global market.
The Arctic remains a difficult region for oil exploration due to its remoteness and high production costs, not to mention environmental challenges. Nevertheless, the Trump administration has plans to license drilling in the Arctic National Wildlife Refuge. Do not be surprised if we hear announcements of new interests emerging.
Africa is also home to tremendous oil and gas resources, as well as minerals and metals. Here, there is interest in expanding supply chain depth beyond oil and gas. On that continent, armed conflict remains an albatross for greater investment, but the costs of the conflicts in Ukraine and Iran, as well as a Western desire to diversify minerals and metals supply chains away from China, are significant counterweights. One way or another, we are going to need Africa.
In North America, producing more oil and gas — “drill, baby, drill,” to use President Trump’s mantra — should be easier relative to other regions, thanks to our capabilities in shale and offshore production, relatively stable legal and regulatory institutions, and access to infrastructure and services that support development.
Of course, oil and gas companies will weigh their investment options against the landscape of all energy opportunities, including nuclear and renewables. Pronouncements of a shift to alternative energy will abound, and new sources could indeed play a role going forward. But make no mistake: Global economic activity relies on our current hydrocarbon-based energy infrastructure. It will go back to work when the current disruption is behind us, just as it has in the past. This is a simple cost-benefit issue.
We clearly need to deepen and diversify energy supply chains, even as the Middle East remains central to trade, just as it has for centuries. Crude oil is the deepest, most fungible commodity market on the planet, and natural gas is hot on its heels. So, a disruption anywhere is felt everywhere. We should be prepared for more of them.
Kenneth Medlock III is the director of Rice University’s Center for Energy Studies.
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