Asia diversifies energy supplies after Strait of Hormuz crisis
Six months after the Iran war exposed the vulnerability of the Strait of Hormuz, Asian economies and energy exporters are investing in alternative routes and suppliers to reduce dependence on the critical waterway.
The Iran war exposed how heavily the global economy depends on a narrow 20-mile waterway, and now governments across Asia are rewriting their energy strategies to avoid a repeat of the crisis. After the United States launched strikes on Iran, Tehran threatened to attack ships traversing the Strait of Hormuz, the channel for much of the Middle East’s oil and gas exports. The threat pushed countries across Asia to impose export bans, cut import duties, and ration fuel to maintain supplies.
Six months into the conflict, the doomsday scenarios of price spikes, long lines at gas stations, power outages, and grounded flights have not fully materialized, as increased production and hefty stockpiles blunted some of the damage. On Wednesday, Iran announced a new revenue-sharing agreement over the waterway, though a military spokesperson blamed the U.S. for obstructing the process. Yet the ease with which Iran was able to threaten one of the world’s most important waterways is pushing governments to diversify their energy sources, and with the prospect of a U.S.-Iran deal on life support, the measures that saved the oil market in the first half of the year may not work a second time.
Before the war, roughly a fifth of the world’s oil trade passed through the Strait of Hormuz, which sits between Iran and Oman. More than 80% of that cargo was bound for Asia, primarily China, India, Japan, and South Korea. Carole Nakhle, CEO at Crystol Energy, noted that many market observers previously believed Iran lacked the capability to block the strait, but the conflict has shown how easy and inexpensive it has become to threaten very expensive energy infrastructure with relatively cheap drones capable of putting refineries, pipelines, and ports at risk.
Saul Kavonic, head of energy research at MST Financial, called the crisis a fundamental paradigm shift for the energy industry. “We’re moving from just-in-time supply chains to just-in-case supply chains,” he said. Energy importers are starting to diversify, with Japan, which relies on the Middle East for 90% of its crude oil imports and roughly 11% of its liquefied natural gas, investing elsewhere to shore up future supplies. Japan’s Inpex formed a joint venture to expand its LNG investment in Australia’s Northern Territory, and Kavonic noted it is boomtime for LNG players like Woodside and Chevron who are not heavily concentrated in the Middle East.
Exporters are also diversifying their supply routes. Oil producers are investing billions into building ports on both the western side of Saudi Arabia and the Gulf of Oman, effectively bypassing the strait entirely, and are investing in pipelines like Saudi Arabia’s East-West pipeline. If these investments pan out, only 10% of the world’s oil will need to travel through the Strait of Hormuz, down from 20% before the war. Gas, however, could become the key energy commodity hurt by a prolonged closure, as there are no alternative routes to get LNG to Asia if Hormuz is blocked. Qatar, one of the world’s leading LNG producers, is trying to keep its export routes open through diplomacy, finding new customers, and setting up a fast recovery timeline to restart production once the strait reopens.
The global market proved more resilient to major supply shocks than many thought, with oil prices surging to as high as $126 per barrel but not reaching the $150 to $200 level some analysts feared. The International Energy Agency coordinated the release of 400 million barrels from emergency reserves in March, and its 32 member countries are mandated to stockpile at least 90 days’ worth of oil. Similar mandates for gas stockpiles were imposed after Russia’s invasion of Ukraine, helping to prevent a lengthy and catastrophic shortage.
