Why the nation is vulnerable to Middle East conflict and how the government plans to reduce reliance on imported oil
For decades, Iran’s greatest perceived threat to the world lay in its nuclear ambitions. But now the conflict in the Middle East has brought to the fore another source of power that it has quietly had all along: the ability to turn off the oil spigot.
Shipping through the Strait of Hormuz, the narrow waterway that carries one in every five barrels of oil traded worldwide, came to a near-complete halt this week following a new wave of attacks on Iranian oil and gas tankers. Using relatively cheap drones and naval mines, Tehran has shown how quickly it can cripple one of the world’s most critical trade routes, driving up crude oil prices and skyrocketing the cost of filling a tank of gas everywhere – as far as suburbs of Sydney and Melbourne 10,000 kilometers away.
Iran’s extraordinary influence over the global economy is ringing alarm bells that go well beyond the current conflict and is forcing the world energy system to adapt to a new geopolitical reality.
“We could call this a turning point,” says Greg Bourne, former head of oil giant BP’s Australasia operations and now a member of the Climate Council. “The Iranians will no longer back down or give up a strategic asset like the Strait of Hormuz; they will use it again and again.”
The immediate response to the crisis was a struggle to keep oil flowing. Governments coordinated unprecedented releases of emergency fuel reserves, encouraged or mandated fuel-saving measures, and sought to maximize all available alternative export routes to move crude oil out of the Gulf. These include the East-West pipeline to Saudi Arabia’s Red Sea port of Yanbu and another bypass through the United Arab Emirates connecting Abu Dhabi’s oil fields with the port of Fujairah.
But that’s not enough, Monash University Business School economics professor Joaquin Vespignani says policymakers and energy companies are also exploring larger-scale plans for new ports and pipeline networks that could reduce their long-term dependence on the trade route.
“Similar to how Europe diversified its gas supplies following Russia’s invasion of Ukraine, Gulf producers are increasingly seeking to diversify their export routes to reduce geopolitical risk,” says Vespignani. “Recent Iran-Israel-US tensions have strengthened concerns that even temporary disruptions in Hormuz could lead to significant price fluctuations.”
Governments in the oil-rich region are spending billions of dollars on the effort. The UAE is expanding its pipeline and export capacity through Fujairah in the Gulf of Oman, and Saudi Arabia is once again exploring ways to increase its east-west pipeline capacity to the Red Sea.
Dubai logistics giant DP World has reportedly begun talks with UAE officials to build a new multi-purpose port and container terminal in Fujairah, while Chevron is also said to be considering a proposal for an extensive new pipeline network from southern Iraq to Kirkuk and across Syria to the Mediterranean, according to reports last week.
Whether such temporary solutions can reduce Iran’s influence before the next regional crisis is another question. “Expansion of existing pipelines or terminals can usually be accomplished within two to five years,” says Vespignani. “Developing completely new cross-border pipeline systems is a much longer process, typically five to 10 years or more.”
Even then, he adds, diversification would reduce Tehran’s pressure on exports rather than eliminate risk. “The key benefit is that diversification reduces the likelihood of a single disruption taking a large chunk of global oil exports out of business,” he says.
This incident revealed a disturbing truth for Australians. Despite its vast energy resources, the country remains heavily dependent on imported liquid fuels and is vulnerable to this year’s global price fluctuations. Most of the petrol and diesel used by Australian drivers, freight operators, miners and farmers is refined in Asia, largely using crude oil from the Middle East; most of these must first pass through the Strait of Hormuz.
There are ways to reduce Australia’s exposure to the threat. A priority will be larger strategic fuel reserves. Before the conflict, Australia had the largest fuel reserves in recent years, but they still fell well short of the International Energy Agency’s recommendation that member countries hold reserves equivalent to 90 days of net imports.
The Albanian government has since announced a $10 billion package to increase minimum stockholding obligations for oil refiners and fuel importers to maintain designated essential fuel stocks on Australian territory and create a state-owned reserve of 1 billion liters. While larger inventories won’t protect drivers from global price cuts, they could prevent shortages if shipments are disrupted again.
Australia is also working to diversify its fuel import chains and has secured additional shipments from around the world, including North America and Europe, this year to reduce the country’s heavy reliance on Asia.
But the most permanent response may be to reduce dependence on oil altogether. Each electric vehicle that replaces a petrol-powered car marginally reduces Australia’s exposure to global crude oil markets. Expanding renewable energy and battery storage similarly reduces the need for natural gas, another commodity that has taken less time to supply and has become more expensive globally since the start of the Iran war.
Climate advocates insist a faster transition away from volatile, globally traded fossil fuels towards domestic renewable energy independence is the only real way to reduce Australia’s vulnerability. Bourne argues that even massive new pipeline networks bypassing Hormuz cannot completely eliminate the threat, because every kilometer of new infrastructure creates another potential target.
“If you go for a pipeline that runs 500 kilometers across Saudi Arabia, that’s 500 kilometers of opportunity and another choke point,” he says. “It’s round, cylindrical and a very, very long choke point.”
The only permanent way to weaken Iran’s influence, he says, is not to find another route for oil, but to need less oil.
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Nick Toscano is an economic correspondent for The Age and the Sydney Morning Herald.Connect with: X or email.
