A shortage of oil from the Strait of Hormuz will drive up global prices, particularly for fuel.
NEW YORK – Much like an oil spill, an oil shortage spreads slowly. The impact of the blockage of the Strait of Hormuz, a route that normally carries 20 percent of the world’s oil supply, will be felt gradually across the globe.
According to Reuters, the distribution logic is straightforward. Because every extra day a ship spends at sea adds to costs, tankers will prioritise markets that are geographically closer.
Around 80 percent of the oil passing through the Strait of Hormuz is destined for Asia, according to the International Energy Agency (IEA). Japan, for example, imports around 95 percent of its oil from the Middle East.
Tankers that left the Gulf on 27 February, the day before the United States and Israel struck Iran, managed to reach their intended ports.
The effects have begun to spread from there. Exports to Europe are relatively small, and to the United States even smaller.
However, once these shipments stop, price signals will become more pronounced. Retail diesel prices in the US have reached US$5.49 per gallon, according to the American Automobile Association.
Although this is 46 percent higher than a month ago, it is still far below Singapore, where prices now exceed US$15 per gallon.
Producers along the US coast have already been exporting more, pushing up domestic prices.
Jet fuel has been hit particularly hard, and other refined products are likely to follow.
Gulf countries have expanded facilities to convert crude oil into feedstocks, lubricants and other products, but many of these can no longer be shipped abroad.
For example, the Middle East exported more than US$10 billion worth of specialised kerosene for aircraft engines last year, much of which is now inaccessible, leaving major importers such as Europe facing critical shortages.
Prices have more than doubled, rising faster than Brent crude. For airlines without hedging, costs are expected to rise by 25 percent, based on IEA data and current prices.
In addition, Middle Eastern crude tends to be heavier and contain more impurities, making it cheaper.
Refineries in Asia are typically designed to process this type of oil. They now have to buy lighter, sweeter and more expensive crude, which may yield less output.
The products produced will also differ. Although refineries have some flexibility, a barrel of WTI, the US benchmark, produces more heavy naphtha, a key component of petrol, than Arabian Heavy.
Heavier crude is better suited for making asphalt and marine fuel. The signal for US producers is to increase drilling, which will boost petrol supplies but leave other consumers short.
Trucks in the US are likely to feel the impact more than private cars. The loss of so much crude from the system will push up prices across multiple sectors.
Transport, manufacturing and agriculture, all major users of oil and its derivatives, will be affected. What remains uncertain is how severe the impact will be and when it will be fully felt. (DK/LM)
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