Because of the ongoing war in the Middle East, transporting oil through the Strait of Hormuz has become dangerous.
With the threat of Iranian attacks still present and naval mines still present in the waterway, many tankers have decided that sailing through the Strait simply isn’t worth the risk.
(March 7, 2016) An F/A-18E Super Hornet assigned to the Warhawks of Strike Fighter Squadron (VFA) 97 performs a flyby during an aerial change of command ceremony above USS John C. Stennis (CVN 74). Providing a ready force supporting security and stability in the Indo-Asia-Pacific, Stennis is operating as part of the Great Green Fleet on a regularly scheduled 7th Fleet deployment. (U.S. Navy photo by Mass Communication Specialist Seaman Tomas Compian/Released)
A U.S. Navy MH-60S Seahawk helicopter with Helicopter Sea Combat Squadron (HSC) 9 transfers ammunition between aircraft carriers USS George H.W. Bush (CVN 77), foreground, and USS Harry S. Truman (CVN 75) in the Atlantic Ocean Feb. 17, 2011. (U.S. Navy photo by Mass Communication Specialist 3rd Class Leonard Adams/Released)
But not everyone.
Despite the dangers, many ships still dare to pass through the waterway.
According to a recent Wall Street Journal article, oil flows through the Persian Gulf, including the Strait of Hormuz, have briefly surpassed pre-war levels as higher profit incentives drive tankers through Hormuz.
The report was published amid a new wave of Iranian attacks against ships in the waterway.
Oil Traffic Through Hormuz is Increasing
According to maritime intelligence company Kpler, oil exports from the Gulf region, through Hormuz and alternative routes, have recently surged.
Over the past week, the region exported an average of 24 million barrels a day, surpassing the pre-war average of 23.3 million barrels per day.
Oil flows through Hormuz averaged 14 million barrels per day, or roughly 82% of the pre-war average.
Kpler attributes this upward trend to several factors: new ways to avoid protection, U.S. protection, and higher financial incentives for tankers willing to make the trip. “The big picture is that the system for shipping through a dangerous Strait of Hormuz is now well-established and the risk appetite of those involved in exporting oil has risen,” said Hamad Hussain, a senior commodities economist at Capital Economics.
Offshore transfers and ship-to-ship transfers account for a sizable share of oil traffic through the strait.
Rather than sending a tanker straight through Hormuz, some companies send smaller, more covert ships through the waterway, then link up with waiting vessels outside the Strait.
This method takes longer than sailing a tanker through Hormuz, but it is safer because smaller ships are typically harder to detect and hit.
With oil prices at their current highs, trading companies can earn $20 more per barrel by reselling Iraqi oil, or about $40 million on a supertanker cargo.
Additionally, tankers are being offered higher bonuses for making the trip.
With these new bonuses, shipowners and crews can make three times their typical monthly salaries. “The volumes remain high despite rising attacks, because profits make it worth the risk,” said Homayoun Falakshahi, Kpler’s head of crude oil analysis.
What’s Causing the Uptick?
Since the war broke out, Gulf states have looked for alternative ways to transport oil to bypass Hormuz.
Oil exporters now use pipelines across Saudi Arabia and the United Arab Emirates.
Preliminary data show that around 40% of oil exports shipped from the region in September bypassed the Strait, up from around 17% before the conflict.
These efforts, however, have been somewhat complicated by attacks from the Houthis in Yemen.
In September, Iran’s proxies launched an attack that hit the East-West Pipeline, one of the main pipelines responsible for the nation’s oil flows.
The facility was later repaired, but the attack highlighted persistent vulnerabilities and the fragility of the region’s oil exports.
Analysts suspect that the recent shipments through Hormuz are undermining the leverage that Iran used to hold over the vital waterway.
In contrast, the U.S. naval blockade against Iranian vessels has completely cripple Tehran’s oil exports, which accounted for a sizable portion of its domestic economy. While Iran still poses a threat in the Strait, many tankers still find the financial incentives worth the risk as exporters seek to capitalize on high oil prices.
Despite Iran’s insistence that it will not allow unauthorized ships through the waterway, many tankers continue to make the voyage.
Don’t Get Excited Yet
However, despite increased traffic through the Strait of Hormuz and alternatives out of Persian Gulf, the oil market isn’t confident this uptick will last, as current oil prices reflect.
For one, Iran continues to attack tankers in and around the waterway. Since last Monday, October 12, the UK Maritime Trade Operations (UKMTO) center has recorded 12 attacks against civilian ships in the region, some of which were recorded off the coast of Iraq and Saudi Arabia.
Despite the financial incentives, the risks of sailing through the Strait remain high as Tehran tries to reassert control over the vital maritime trade route.
Although Iran’s hold on the Strait has “weakened,” the threat of attacks still achieves its desired effect. Oil prices remain high, and gasoline and diesel prices are also high in the U.S. Tehran may not be able to strike every ship in the Strait, but its threats are still sowing uncertainty in the oil market.
Furthermore, the energy market is bracing itself for another hot phase of the war.
For the past month or so, the war in Iran has been in a quiet phase as the U.S. and Iran have refrained from attacking each other.
President Trump promised not to launch any new attacks against Iran until after the midterm elections in November.
However, with the midterms less than two weeks away, mutual attacks are likely to resume in November. Analysts suspect that renewed confrontation between the two sides will likely bring traffic in the Strait to a crawl again.
Despite Iran’s protests, oil is still flowing through the waterway, but that progress could vanish in a blink, and the market could find itself in the same position it was in March.
About the Author: Isaac Seitz
Isaac Seitz, a Defense Columnist, graduated from Patrick Henry College’s Strategic Intelligence and National Security program. He has also studied Russian at Middlebury Language Schools and has worked as an intelligence Analyst in the private sector.
