What's New

Middle Eastern oil producers have slashed production by between 7 and 12 million barrels daily since the first strikes that the U.S. and Israel launched on Iran on February 28. Exports have been paralysed almost completely, and Iran is charging $2 million for every vessel it lets pass through the Strait of Hormuz. Saudi Arabia, however, has an alternative: a pipeline that was built for just such a situation.

The East-West pipeline leads to Saudi Arabia’s Red Sea port city of Yanbu. The pipeline is 1,200 km long, and it was initially built in the 1980s, during the Iran-Iraq war that also threatened to disrupt traffic in the Persian Gul although it never came close to the closure of the Strait of Hormuz that has now sent the world reeling. Maximum capacity stands at 7 million barrels daily after a series of upgrades over the years, yet average flows are lower, even now.

According to figures cited by Bloomberg, last week loadings from Yanbu averaged 4 million barrels daily, with tankers essentially standing in line to load Saudi crude from the Red Sea port. Data from Kpler, quoted earlier this week by Reuters, suggested that the daily loading rates at Saudi oil export terminals since the start of the month have averaged 4.355 million barrels. Loadings from Yanbu specifically are seen at an average of 3.8 million barrels daily, which would be an all-time high.

Even so, the total for March would be a lot lower than the February average, which stood at 7.1 million barrels daily. As a result, the Saudis have told some of their Asian clients they will be getting smaller volumes of crude next month, after such a warning was issued for March loadings for Asia as well.

“The mere existence of an alternative route helps calm markets by reassuring buyers that not all the region’s exports are trapped,” Carole Nakhle, CEO of energy consultancy Crystol Energy, told Bloomberg this week. “That said, it’s not a risk-free alternative. If Yanbu and the East-West system were to come under sustained pressure, that would mark a serious escalation.”

Indeed, Iran has already hit a refinery in Yanbu, which Aramco operates jointly with Exxon. The strike suggests there is no safe piece of energy infrastructure in the Middle East, which is certainly food for thought right now. Still, as noted by Nakhle, the presence of an alternative export route has some mitigating effect on sentiment about supply security, even if exports from the Red Sea are much lower than what the Saudis used to export before the war. The problem is, the Red Sea could also see severe traffic disruption.

A couple of years ago, the Yemeni Houthis choked off maritime transport via the Red Sea in response to Israel’s bombing of Gazans, diverting a solid portion of world trade around Africa. Since last year, after Israel and Hamas agreed on a ceasefire, the situation has improved, but the Houthis, which are affiliated with Iran’s government, have recently “stepped up threatening rhetoric”, as described by the Wall Street Journal.

“If the Houthis enter the conflict, it really raises the stakes,” Adam Baron, a fellow at liberal think tank New America, told the publication. “It pulls the Suez Canal and the Egyptians in, it brings Saudi further in.”

In other words, the East-West pipeline has provided some much-needed relief to the Middle East’s biggest oil exporter, but it cannot really be a replacement for the Strait of Hormuz, not only because of its capacity but because of its location. What the events since February 28 have reminded the world is that a fifth of the world’s oil supply comes from a highly vulnerable region with the potential for massive supply disruptions.

By Irina Slav for Oilprice.com