The main concern is that Bab el-Mandeb now provides a vital alternative to the Strait of Hormuz. Following restrictions on shipping in the Persian Gulf, Saudi Arabia has significantly increased its use of the East-West oil pipeline, which runs from inland oilfields to the port of Yanbu on the Red Sea coast.
From there, oil destined for Asia passes through Bab el-Mandeb. If the strait were also closed, the global market would lose not only a major shipping route but also the primary alternative for Saudi oil exports.
Just a few successful attacks on tankers – or a credible threat that such attacks could recur – would be enough. Insurance premiums would surge, shipowners would begin rerouting vessels around the Cape of Good Hope and journeys between Asia and Europe would take more than a week longer. Freight rates and oil prices would rise accordingly.
If the disruption to shipping were short-lived, Brent crude could rise from its current level of around $88 a barrel to approximately $95–$100. A blockade lasting several weeks could push prices into a range of $100–$120 a barrel.
If problems in the Strait of Hormuz persisted at the same time and Saudi oil exports were significantly restricted, prices above $120 a barrel could not be ruled out.
Diesel Is the More Vulnerable Market
All this is happening while global markets for petroleum products – particularly diesel – are already under unprecedented strain. Pressure on diesel supplies is even more acute than that affecting crude oil, compounded by Ukrainian attacks on Russian refineries.
As a result, Russia has banned diesel exports while continuing to export crude oil. If the closure of the Gate of Tears pushed oil prices back above $100 or even $120 a barrel, the impact on the diesel market would be more severe still.
The gap between diesel and crude oil prices in Europe is already the widest in history. Judged by the relationship seen during the past several months of war in the Persian Gulf, current diesel prices correspond to a crude oil price of approximately $110 a barrel.
The premium for diesel over crude oil exceeded $65 a barrel last week, compared with an average of $45 during the war with Iran. Before the conflict began, it had fallen as low as $20.
Any shortfall caused by the closure of Bab el-Mandeb could be only partly offset by releases from strategic oil reserves or increased production in the US, Canada or Brazil. Such measures would take time and could not immediately replace a potential supply shortfall of several million barrels a day from the Persian Gulf.
The market would therefore have to resolve part of the imbalance through the classic mechanism of significantly higher oil prices. These would curb demand while giving producers a greater incentive to increase output. Such a scenario would create renewed inflationary pressure not only in Europe but across virtually the entire global economy.
Originally published on the author's personal website lukaskovanda.cz.
