The end of cheap energy security: billions will be spent making oil harder to disrupt

The world has spent decades building an extraordinarily efficient global energy system.

Oil is produced where geology permits, loaded onto tankers, transported through the most economical routes and delivered to refineries thousands of kilometres away.

Efficiency kept costs down.

But efficiency also created vulnerabilities.

The crisis surrounding the Strait of Hormuz is exposing one of the largest of them — and businesses around the world may ultimately pay for the solution.

Middle Eastern oil producers are increasingly considering billions of dollars of additional pipelines, terminals, storage facilities and alternative shipping arrangements designed to reduce their dependence upon the world's most important oil chokepoint.

It represents a fundamental change in thinking.

The objective is no longer simply to move oil as cheaply as possible.

It is to make sure the oil can move at all.

One narrow passage became too important

The Strait of Hormuz is only about 54 kilometres wide at its narrowest point.

Yet approximately 20 million barrels a day of crude oil and petroleum products passed through it during 2025 — around a quarter of the world's seaborne oil trade.

About 80 per cent of those petroleum flows were destined for Asia.

That extraordinary concentration created efficiency during peaceful times.

It also created systemic risk.

The present conflict has transformed that risk from an economic scenario into an operational problem.

Ships have been attacked.

Insurance risks have increased.

Shipping patterns have changed.

Production has been disrupted.

And countries that depend upon Hormuz have discovered the economic consequences of possessing enormous oil reserves without having a secure means of getting the product to customers.

Saudi Arabia has an advantage

Saudi Arabia already possesses one of the most important pieces of energy-security infrastructure in the region.

Its East–West Pipeline connects the country's eastern oil-producing areas with Yanbu on the Red Sea.

That allows Saudi crude to cross the Arabian Peninsula rather than travel through Hormuz.

The pipeline's capacity has reportedly been increased to around seven million barrels a day, although sustained operation at that level has not been comprehensively tested.

During the present crisis, its strategic importance has become obvious.

Saudi exports through Yanbu increased sharply as the kingdom redirected crude away from Hormuz.

Saudi Arabia is now considering expanding its East–West capacity by as much as another two million barrels per day.

Such a project would cost billions.

But the calculation has changed.

Infrastructure that once looked like expensive redundancy can suddenly look like inexpensive insurance.

Iraq is contemplating a US$15 billion answer

Iraq faces a more difficult problem.

Its southern oil exports are heavily dependent upon the Persian Gulf and therefore Hormuz.

It is now considering an enormous new pipeline running through Syria to the Mediterranean.

The proposed project could reportedly transport as much as two million barrels of crude per day.

It could also cost at least US$15 billion and take approximately four years to complete.

That is an extraordinary commitment of capital.

But consider the alternative.

An oil-producing country can lose enormous amounts of revenue if geopolitical events prevent it from exporting its production.

A US$15 billion pipeline therefore cannot be assessed simply as another infrastructure project.

It is effectively an insurance policy covering a substantial part of a nation's export economy.

Kuwait faces the same problem

Kuwait has also been discussing alternative pipeline arrangements with neighbouring countries.

Its geography leaves it particularly exposed.

Unlike Saudi Arabia and the United Arab Emirates, Kuwait does not currently possess an operational crude pipeline providing a substantial independent route around Hormuz.

The crisis has therefore demonstrated the commercial value of something that cannot easily be created during an emergency: spare infrastructure.

Pipelines take years to plan, finance and construct.

Ports require enormous investment.

Storage facilities require land and capital.

Shipping fleets cannot be expanded overnight.

Energy resilience has to be purchased before it is required.

The UAE provides another model

The United Arab Emirates has already invested heavily in diversification.

Its pipeline from Habshan to Fujairah allows crude to reach the Gulf of Oman without travelling through Hormuz.

Fujairah has consequently become considerably more than another oil port.

It is strategic infrastructure.

The UAE has also developed major storage capacity around Fujairah, providing additional flexibility when normal supply chains are interrupted.

The commercial lesson is straightforward.

Redundancy costs money when it is not being used.

It can be priceless when it is.

The world's cheapest route is no longer necessarily the cheapest

Businesses normally attempt to remove duplication.

One warehouse instead of two.

One supplier instead of several.

Just-in-time inventory instead of stockpiles.

The cheapest shipping route rather than an alternative route.

Capital is expensive, and unused infrastructure produces poor returns.

But those calculations change when disruption becomes frequent enough.

A company saving $1 million annually through a highly concentrated supply chain has achieved little if a single disruption subsequently costs it $50 million.

The same principle applies to countries.

The Middle East is effectively being forced to reconsider the value of redundancy on an enormous scale.

Pipelines are only part of the bill

The investment required to reduce Hormuz dependence will not stop with pipelines.

Alternative export systems require:

• additional oil terminals;
• pumping stations;
• storage tanks;
• port infrastructure;
• security;
• shipping capacity;
• roads and support infrastructure;
• communications systems;
• maintenance facilities;
• emergency reserves; and
• potentially additional refining capacity.

Billions of dollars of investment can therefore follow a single decision to diversify an export route.

There is also another complication.

Moving Saudi oil to the Red Sea avoids Hormuz but introduces other geopolitical risks.

The Red Sea and Bab el-Mandeb have themselves experienced attacks and shipping disruption.

There is no completely risk-free route.

The answer is therefore likely to be multiple routes rather than another single route.

And multiple routes cost money.

Someone eventually pays

Energy infrastructure is not free simply because governments or national oil companies construct it.

Capital expenditure ultimately becomes part of the economics of producing and delivering energy.

So do higher insurance premiums.

So does additional security.

So do longer shipping routes.

So does maintaining spare capacity.

The global economy may consequently be entering an era in which resilience becomes another component of the oil price.

Consumers may never see a line on their petrol receipt marked "energy security".

But the cost exists nonetheless.

Australian businesses are downstream from the problem

This matters to Australian business because petroleum costs spread throughout the economy.

Australia imports substantial quantities of refined petroleum products.

A trucking company feels higher diesel prices directly.

A construction business pays more to operate machinery.

A farmer pays more to run tractors and harvesters.

An airline pays more for aviation fuel.

A retailer may pay indirectly through higher freight charges.

A manufacturer may encounter higher transport and input costs.

Even businesses with little apparent exposure to oil can ultimately encounter its price through their suppliers.

Energy is embedded throughout the cost structure of the economy.

Insurance may become as important as the oil price

Another emerging cost deserves attention.

Shipping through conflict zones requires insurance.

As risks increase, insurers demand higher premiums or restrict coverage.

Shipowners may demand additional compensation.

Crews may become reluctant to enter dangerous areas.

Tankers may take longer routes.

All of those costs accumulate before the crude oil even reaches a refinery.

The headline price of a barrel of oil therefore tells only part of the story.

The delivered cost matters to business.

Supply-chain thinking is changing

There is a broader business lesson in the Hormuz crisis.

For years, globalisation rewarded concentration and efficiency.

Companies found the cheapest manufacturer, the cheapest shipping route and the lowest practical inventory level.

COVID-19 challenged that philosophy.

Trade tensions challenged it again.

Wars and shipping disruptions have reinforced the message.

The cheapest supply chain is not necessarily the best supply chain.

Increasingly, businesses are asking another question:

What happens if our primary supplier, shipping route or market suddenly becomes unavailable?

That is exactly the question Gulf oil producers are now confronting.

Resilience has become an asset

There was a time when a spare pipeline might have been regarded as underutilised capital.

Today it can be regarded as strategic capacity.

The same applies to storage.

The same applies to alternative ports.

And the same principle can apply to an Australian business maintaining two suppliers instead of one.

Redundancy has a cost.

Dependency has a risk.

Good management requires understanding both.

Opportunities will emerge

There is another side to this enormous restructuring.

Billions of dollars of infrastructure spending creates business.

Engineering companies will be required.

Pipeline manufacturers will be required.

Construction contractors will be required.

Port operators, technology companies, security providers, insurers, financiers and logistics businesses will participate.

The attempt to reduce dependence upon Hormuz could develop into one of the world's major energy-infrastructure investment themes.

The conflict is therefore simultaneously destroying economic value and creating demand for an entirely new class of defensive infrastructure.

The Business Times View

The Strait of Hormuz crisis has exposed the hidden price of efficiency.

For decades, enormous quantities of the world's energy could move through one narrow maritime passage because doing so was practical and economical.

Now the weakness in that model is impossible to ignore.

Saudi Arabia is considering expanding its route to the Red Sea.

The UAE has demonstrated the value of its Fujairah connection.

Kuwait is examining alternatives.

Iraq is contemplating spending at least US$15 billion on a pipeline towards the Mediterranean.

These are not temporary responses to an inconvenient shipping delay.

They are potentially the beginning of a fundamental restructuring of Middle Eastern energy infrastructure.

And there is a lesson for businesses far removed from the Persian Gulf.

The cheapest system works brilliantly until it stops working.

The next era of global commerce may therefore place a premium not simply on efficiency, but on resilience.

That means spare capacity, alternative suppliers, additional storage and multiple transport routes.

All cost money.

But the Strait of Hormuz has demonstrated what insufficient redundancy can cost.

Energy security was never really cheap.

For many years, the world simply did not include the risk in the price.