Battle of pipelines: Hormuz is clamped but other routes exist for Gulf oil to flow—if Iran lets it

Enter the East-West pipeline, a 1,200km conduit crisscrossing the Arabian Peninsula from the Gulf to the Red Sea. Its raison d’être is to meet this historic moment. Riyadh built it 45 years ago thinking that one day Tehran would manage to do what was then unthinkable and halt shipments through the Strait of Hormuz.

The strait is a chokepoint for about 20 million barrels a day of crude and refined products—a fifth of global consumption. The Saudi pipeline can’t offset all of that, but it can provide a workaround for as much as 5 million daily barrels. Another pipeline, owned by the UAE, offers a separate bypass option to the Gulf of Oman for 1.5 million barrels. In an emergency, the UAE can probably push it close to 2 million.

Together, these pipelines can slow if not stop runaway petroleum prices if both countries can get enough tankers into the loading ports where the oil ends up. Recently, about 25 supertankers, each capable of loading about 2 million barrels, shifted course and were headed towards the new pickup points. It remains to be seen how the ports will cope with these armadas.

The loss of supply since the first strikes on Iran has been so brutal that oil prices jumped well above $100 a barrel, rising 20% in just a few seconds when markets opened on Sunday. But maybe the pipeline bypasses can delay further gains, buying time for Trump. The White House is still betting that it can finish the war before the petroleum pressure becomes unbearable.

“We figured oil prices would go up, which they will,” Trump told reporters on Saturday night. “They will also come down. They’ll come down very fast. And we will have gotten rid of a major, major cancer on the face of the Earth.”

The strategy appears to have been designed on the fly as the war didn’t go as planned. To succeed, Trump needs the Saudi-UAE bypass pipelines to make a difference.

Second, he needs to end the war in days rather than weeks—or at the very least get some supertankers in and out of the Strait of Hormuz in that timeframe. The pipelines are only temporary cushions.

Finally, he needs the region’s oil production, refining and loading facilities to emerge from the war relatively unscathed, to allow for a rapid resumption of exports.

All are enormous wagers. What’s clear is the inadequacy of the assumptions Washington made ahead of the war.

On Sunday, state-owned Saudi Aramco was simultaneously loading three very large crude carriers (VLCCs) at its Yanbu and Al Muajjiz terminals on the Red Sea. This is evidence that it is diverting as much oil as possible away from the Hormuz route. Adnoc, Abu Dhabi’s state producer, was loading another VLCC at Fujairah, outside the strait. The scale of the operation at these three sites is unprecedented.

Will it work? In real terms, adjusted by the cumulative impact of inflation, oil is still well below previous spikes. The $139-a-barrel reached in March 2022 after Russia invaded Ukraine is about $157 in today’s money. The $147.50-a-barrel touched in July 2008 is equivalent to about $205 a barrel now. Plus the price impact has been short-lived so far, measured in days rather than months or quarters.

For an oil spike to become a full-blown crisis, the price needs to move higher and stay there for a time. But as the days of bombings and counter-attacks turn into weeks, it will start to hurt the market.

And there are new dangers. Saudi Arabia and the UAE are walking a security tightrope. Diverting oil via workaround pipelines is part of their commitment to keep energy markets supplied no matter what.

But their actions clearly help Washington and may invite further military retaliation from Tehran. As more tankers head to new loading points outside the Gulf, there’s nervousness among industry officials in Riyadh and Abu Dhabi that these pipelines, their pumping stations and even ports will be attacked by Iranian drones.

Sunni Arab states in the Gulf have long had tense relations with Iran, a Shia-majority country. And yet, in recent years Riyadh and Abu Dhabi have sought to improve relations with Tehran. Oil is dragging them into the latest conflict—with unknown consequences for the region and beyond.

Increasingly, Gulf War 3 resembles some episodes of World War II. Think about the Battle of the Atlantic, where Germany tried to cut off Britain’s supply of essential commodities. Now, it’s the Battle of Pipelines. ©Bloomberg

The author is a Bloomberg Opinion columnist covering energy and commodities.