Updated ,first published
The reopening of hostilities between the US and Iran has reignited fears that the Strait of Hormuz will remain closed for months or even years, shutting off the key shipping channel from the Middle East that carries 15 per cent of the world’s oil supply.
The war has, since the end of February, reshaped the global oil trade as Asian refineries, and by extension Australia, receive shipments from around the world, including Canada, Brazil, Georgia and even Gabon and Congo in Western Africa.
As soon as the strait was shut, from February 28 on the first day of the war, urgent media reports warned that Australia would run dry of petrol and diesel by May as Asian refineries, which supply most of the nation’s fuel, sourced more than 90 per cent of their crude oil from the Middle East.
Now, in the second week of June, Australia’s fuel stockpiles are bigger than ever before and warnings of the so-called fuel supply cliff, and nationwide driving restrictions that were expected to be imposed, have evaporated.
How have the Asian refineries defied the predictions and kept the fuel flowing to Australia?
Cashing in
The way the region circumnavigated what is the biggest global oil shock in history is both a hopeful story, as global trade rebalances, and bad news for the poorest in the region who are disproportionately feeling the brunt of war.
The most positive news for the region is that oil is flowing to Asia’s giant refineries from far-flung countries around the world.
Producers are scrambling to fill the gap created by the Middle Eastern blockade and cash in on war prices.
The greatest increase in exports to Asia is coming from the US, where oil companies are cashing in on the war launched by President Donald Trump. The global benchmark for oil has spiked on the conflict, averaging around $US70 a barrel before the war and more than $US95 since.
Prime Minister Anthony Albanese said on Wednesday that Australia continued to grow its diesel and petrol stockpiles, but stressed that the resumption of hostilities clouded Australia’s future.
“On many occasions that [a ceasefire] has been declared, but we have a caveat, of course, which is that it’s uncertain, but that’s creating a great deal of difficulty as well,” he said.
Argus Media Australia lead Jo Clarke said Asian refineries had pivoted to new markets in the weeks after the war began, with the biggest increase coming from the US, while Japan and Korea were also drawing down their considerable oil stockpiles.
“Korea and Japan, as well as Singapore and Taiwan, they are all locking in crude oil from the Atlantic basin, which comes from the US, Canada and Latin America,” Clarke said.
“They used to get their crude oil from just-in-time supply chains, but we are seeing bookings for cargoes right the way up to the end of the year.”
Smaller oil producers are also scrambling for a share of wartime profits, and recent oil shipments have come to Asia from nations as disparate as Canada, Mexico, Colombia, Gabon, Turkey, Egypt, Georgia, Brunei, Venezuela and Brazil.
The oil supply chain has stepped into the breach on the supply side, with producers all over the world pulling out all stops to increase production rates and reopen mothballed facilities, while refineries have scoured the globe for new contracts.
“They’ve just proven to be much more adaptable than people thought and have been able to get a hold of crude from other places in the world,” Clarke said.
Another new trend in diesel supply has also kicked off, with Australia taking repeat shipments of diesel from the US.
The cost
Another factor in a global rebalancing is the US lifting of sanctions on Russian oil, which is flowing freely to India and China.
However, while rich nations like Australia are keeping their economies fuelled up by digging in to their deep pockets for higher-priced fuel, rising prices have forced poorer countries to reduce their fuel consumption.
This so-called demand destruction has forced industries in some poorer nations, like transport and manufacturing, to slow down or shut their operations, revealing an economic downturn driven by high fuel prices.
Import-dependent countries, including Thailand, the Philippines, Sri Lanka, Bangladesh, Myanmar, Laos, Vietnam and Cambodia, have been hit with major fuel price spikes that have raised the prices of commodities across supply chains.
There are reports more than 50 per cent of Thailand’s huge fishing fleet has been grounded. Driving restrictions are in place in many countries across South-East Asia.
Many farmers across the region are leaving rice crops in the ground due to the cost of fuel for harvesting.
Closure of the Strait of Hormuz has also cut off major sources of global fertiliser, putting further pressure on food production. Currencies across the board are being devalued.
Around 60 per cent of India’s liquefied petroleum gas (LPG), which is used for home cooking, came via the Strait of Hormuz. Now restaurants are shutting down and households are turning to alternatives like wood, kerosene and coal wherever they can.
The future
The future remains uncertain. Market analysts expect the price of oil to rise well beyond $US100 a barrel if shipping from the Middle East remains constrained for months, and warn prices of $US150 to $US200 a barrel could set in next year if there is no resolution to the blockade.
However, amid the economic carnage there is some hope for Australia.
Renewable energy and batteries are decoupling Australia’s power prices from volatile global markets, helping shield consumers from severe electricity bill shocks emerging in other countries.
Clarke said Australia should be able to secure enough fuel in the coming months due to ongoing demand destruction in poorer countries and our ability to absorb higher fuel costs.
“We’re seeing a lot of demand destruction outside of Australia. Across South-East Asia, there’s lots of people just not driving or not burning fuel,” she said.
“Australia, Japan, Korea, wealthier countries, have the ability to pay more and lock in their fuel supplies. This means they are not facing a supply cliff, but higher costs for fuel.”
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Mike Foley is the climate and energy correspondent for The Age and The Sydney Morning Herald.Connect via email.