When the Oil Bypass Gets Blown Up

For years, the Strait of Hormuz has been treated as the great choke point of the global energy system. Roughly a fifth of the world's oil and liquefied natural gas normally passes through that narrow strip of water between Iran and Oman. Every war game involving the Persian Gulf eventually arrives at the same question: what happens if Hormuz closes? Saudi Arabia had an answer: build a bypass.

The kingdom's East-West Pipeline runs approximately 1,200 kilometres across the Arabian Peninsula, carrying crude from the great oil-producing regions in the east to Yanbu on the Red Sea. Instead of putting Saudi oil aboard tankers in the Persian Gulf and sending it through Hormuz, Riyadh could pump the stuff across the desert and load it safely on the other side. It was one of the great pieces of strategic insurance in the world energy system. Then somebody attacked the insurance policy.

Saudi Arabia confirmed that its East-West Pipeline was struck in multiple attacks on September 10. The government shut the line while technical teams assessed the damage. This matters enormously because the pipeline had become much more than a contingency plan. With the Strait of Hormuz severely disrupted by the current Middle Eastern war, approximately four to five million barrels a day had recently been moving through the East-West system. That is around four to five per cent of global oil supply travelling through one alternative route, and now that route has been interrupted as well.

The immediate consequences are already appearing. Reuters reports that Saudi Arabia has cancelled some September crude cargoes to European customers and that loadings at the Red Sea port of Yanbu have been suspended. Poland's Orlen, heavily dependent upon Saudi crude, has been hunting for replacement supplies from the North Sea, United States, Kazakhstan, Algeria and Guyana. The market noticed: Brent crude finished September 15 at $108.75 a barrel, while physical European cargo prices were reportedly even higher.

This is where an obscure-looking pipeline attack becomes much more interesting than another day's military news from the Middle East. The global oil system depends not merely upon reserves but upon routes. It is little use having billions of barrels underground if you cannot move them from the oilfield to the refinery. Pipelines, ports, pumping stations, tanker lanes and narrow waterways are the circulatory system of industrial civilisation. Remove enough arteries and the size of the heart becomes irrelevant.

Saudi Arabia's East-West Pipeline was constructed precisely because everybody understood this problem with Hormuz. Yet building an alternative route does not abolish vulnerability; it merely moves the vulnerability somewhere else. That is what has now happened.

There is a second choke point lurking on the western side of Arabia: Bab el-Mandeb, the narrow entrance connecting the Red Sea with the Gulf of Aden. Houthi forces have recently made major advances along Yemen's Red Sea coast and seized strategically important territory and islands around the strait. The exact military situation remains fluid, and claims that they control the "entire Red Sea coast" go further than the established evidence. Nevertheless, the strategic problem is obvious: escape Hormuz and you arrive in another contested maritime system.

For Europe, the geography is slightly less catastrophic than it initially sounds. Oil leaving Yanbu for Europe travels north through the Red Sea towards Egypt rather than south through Bab el-Mandeb. But the broader Red Sea shipping system is becoming increasingly militarised, while the East-West Pipeline feeding Yanbu is itself presently out of action.

The Saudis are not sitting helplessly beside the broken pipe. Reuters reported on September 16 that Aramco is offering Asian customers crude through ship-to-ship transfers off Sohar in Oman. Saudi loadings at Ras Tanura and Juaymah inside the Gulf have also surged. Tankers and traders will search for every available workaround because at more than $100 a barrel there is an enormous incentive to find one.

This does not mean that Saudi oil has stopped flowing. What is happening is more interesting and potentially more consequential: the redundancy built into the global oil system is being consumed. Hormuz becomes dangerous, so Saudi Arabia uses the East-West Pipeline. The East-West Pipeline is attacked, so Saudi Arabia increases Gulf loadings and arranges transfers off Oman. European refiners lose Saudi cargoes, so they bid for North Sea, American, Kazakh, Algerian and Guyanese oil. Tankers change routes, traders change suppliers, prices rise and the machine keeps running, until another part fails.

That is how complex systems usually approach genuine trouble. They do not simply switch from functioning perfectly to collapsing overnight. They lose margins. Spare capacity disappears. Alternative routes become primary routes and emergency measures become ordinary operations. Each successful workaround leaves fewer workarounds available for the next disruption.

The East-West Pipeline is an unusually good example because its entire strategic purpose was redundancy. Saudi Arabia spent enormous sums ensuring that a crisis in the Persian Gulf could not imprison its oil behind the Strait of Hormuz. The current crisis has demonstrated that the strategy works, right up until somebody attacks the pipeline providing the escape route.

There is an uncomfortable lesson here for Western governments that have spent years assuming energy security can be treated largely as an exercise in markets and prices. A market cannot bid a destroyed pumping station back into existence. Financial instruments cannot escort a tanker through a missile engagement, and futures contracts cannot repair a pipeline. Physical systems ultimately depend upon physical things.

Australia should pay particular attention. We are an energy exporter but remain heavily dependent upon imported liquid fuels and internationally integrated refining and shipping networks. A country can possess coal, gas, uranium and sunshine in spectacular abundance while still discovering that trucks, tractors, mining machinery and much of the transport system require fuels that must be refined, transported and distributed through vulnerable supply chains.

The Saudi episode is therefore worth watching even if the pipeline is repaired quickly. US Energy Secretary Chris Wright has suggested the interruption may be measured in days rather than weeks. If he is right, the immediate crisis could ease remarkably quickly, but repairing the pipe does not erase what the attack revealed.

One of the world's largest oil producers developed a strategic route specifically to bypass one of the world's most dangerous maritime choke points. When that choke point became severely disrupted, the bypass did exactly what it was designed to do. Then the bypass itself was attacked.

There is a certain brutal elegance to that sequence. Modern civilisation has become extraordinarily good at building redundancy into systems whose continuous operation we take for granted. What it is less comfortable contemplating is what happens when several layers of redundancy are tested simultaneously.

The question is no longer simply whether Saudi Arabia can repair a pipeline. It is how many alternative routes remain when the alternative route needs an alternative of its own. With the situation developing rapidly, the answer could look materially different within days.

https://www.news.com.au/finance/economy/world-economy/drone-attacks-on-critical-saudi-oil-pipeline-threaten-global-economic-shock/news-story/91d9a244df38dccad9701f0ddb6a77c6