The war is spreading to the Hormuz bypass — and that raises the stakes for Australia

The world has spent months learning how to work around the Strait of Hormuz.

Now it may have another problem.

The alternative route is becoming vulnerable too.

The United Arab Emirates has suspended all trade, commercial exchanges and financial transactions with Iran after accusing Tehran of launching two ballistic missiles that appeared to target maritime traffic near the UAE.

Iran has rejected the allegation as baseless.

No direct strike was reported from the latest missiles, which the UAE says fell into the sea.

But economically, their significance extends well beyond where they landed.

The UAE — and particularly the oil infrastructure around Fujairah — has become one of the critical components of the international energy system being constructed to bypass the severely disrupted Strait of Hormuz.

That makes any deterioration in security around the UAE a matter of international energy security.

And ultimately, an Australian economic issue.

The world has been finding another way to move oil.

It now has to make sure that alternative remains safe.

The UAE has broken economically with Iran

The immediate diplomatic response has been significant.

The UAE announced the suspension of all trade activities, commercial exchanges and financial transactions with Iran until further notice, saying the escalation threatened regional and international peace and security.

Iran denies launching the missiles.

The disagreement cannot presently be resolved independently.

What is clear is that relations between the two Gulf neighbours have deteriorated substantially.

That matters because the UAE has historically maintained considerable commercial links with Iran despite broader regional political tensions.

The latest decision therefore represents considerably more than another hostile statement.

Economic relationships are being severed.

And markets noticed.

Abu Dhabi's benchmark share index fell 0.9 per cent in early Wednesday trading, while Dubai's market also declined.

Why Fujairah suddenly matters to everybody

Most Australians would have little reason to know much about Fujairah.

The Iran war has changed its importance.

Fujairah sits on the UAE's eastern coastline on the Gulf of Oman.

Crucially, it is outside the Strait of Hormuz.

The Abu Dhabi Crude Oil Pipeline allows UAE crude to travel overland to Fujairah and be exported without a tanker having to pass through Hormuz.

Before the war, that was useful infrastructure.

During the war, it became strategic infrastructure.

It is one of the escape valves allowing Middle Eastern oil to continue reaching international customers despite the disruption of the Strait.

The bypass has already been attacked

The latest missile scare cannot be considered in isolation.

Fujairah's energy infrastructure has already been caught in the conflict.

A drone attack on March 14 struck the Port of Fujairah and interrupted some oil-loading operations.

Then on May 4, another attack caused a fire in the Fujairah Oil Industry Zone and disrupted aviation across the UAE.

Reuters noted at the time that Fujairah had become critical to UAE oil exports precisely because it allows crude to bypass Hormuz.

The concern is therefore not hypothetical.

One of the principal alternatives to Hormuz has already experienced direct wartime disruption.

China is increasingly relying on this system

The significance becomes clearer when we look at what Chinese shipping companies are doing.

Two major Chinese state-owned shipping groups have stopped sending their tankers through Hormuz and Bab el-Mandeb.

Instead, cargoes can be transferred outside the most dangerous areas.

Those operators had previously transported roughly half of China's Middle Eastern crude imports.

That is an enormous amount of oil logistics being reorganised because the traditional routes have become too dangerous.

Fujairah and nearby waters form part of that emerging alternative system.

For China, it provides access to Middle Eastern crude without exposing every tanker to Hormuz.

For producers, it provides customers.

For global oil markets, it helps prevent shortages.

And indirectly, it helps Australia too.

Australia is connected through Asian refineries

Australia does not need to purchase Iranian oil to be economically exposed to this conflict.

Nor does an Australian tanker need to pass through Hormuz.

Our vulnerability is largely downstream.

Australia imports most of the refined petroleum it consumes.

Asian refineries supply substantial quantities of the petrol, diesel and aviation fuel used here.

Those refineries need crude.

If Middle Eastern crude continues reaching Asian refineries through Fujairah, alternative ports, ship-to-ship transfers and other arrangements, Australian fuel supply becomes more secure.

If those alternative arrangements themselves become seriously disrupted, the problem becomes much larger.

The first safety net is Hormuz

Think of the international petroleum system as possessing layers of redundancy.

Normally, Hormuz is the principal route.

When Hormuz fails, alternative pipelines and ports become the safety net.

Fujairah is one of them.

Saudi Arabia's westward pipelines and Red Sea infrastructure provide another.

Replacement crude from the United States and West Africa provides another.

Strategic petroleum reserves provide another.

Each layer makes the international system harder to break.

But the system becomes progressively more vulnerable if those backup mechanisms are themselves disrupted.

That is why the latest escalation deserves attention.

The Strait itself is still barely functioning

There is little evidence that Hormuz is returning to normal.

Kpler data reported by Reuters showed only six commodity vessels crossed the Strait on Tuesday, down from nine on Monday and below the already severely depressed recent average of around 11 daily crossings.

Before the war, the Strait handled around one-fifth of global oil and LNG movements.

The United States says the waterway is open.

Iran says it remains closed.

The commercial shipping industry is effectively providing its own verdict.

Major operators are still staying away.

Saudi Arabia provides one encouraging sign

There is some positive news.

Saudi Aramco has resumed loading some crude from inside Hormuz and has additional tankers waiting.

Saudi Arabia is simultaneously offering Asian customers crude through alternative arrangements outside the Strait, including ship-to-ship transfers around Fujairah.

That is precisely the kind of redundancy the global system needs.

Try the traditional route where possible.

Maintain the alternative route in case it is not.

But that strategy becomes more difficult if the security situation around the alternative export areas deteriorates.

Oil is already responding

Brent crude climbed to about US$91.79 a barrel on Wednesday, its highest level in three weeks.

West Texas Intermediate reached around US$85.79.

The increase reflects continuing uncertainty over Hormuz, weak prospects for a diplomatic settlement and concern about physical supply.

There are already warnings that Brent could return to triple digits if conditions deteriorate substantially.

That does not mean US$100 oil is inevitable.

Far from it.

Alternative supplies continue moving.

Demand conditions provide some restraint.

Saudi exports are adapting.

Iraqi alternatives are being developed.

But the risk premium remains.

Australia has another problem: refined fuel

Even the crude price does not tell the entire Australian story.

The international diesel market has become exceptionally tight.

Refinery disruption in the Middle East and Russia has contributed to extraordinary diesel refining margins.

Australia therefore faces several interconnected costs.

Crude.

Freight.

Insurance.

Refining.

Diesel.

Jet fuel.

Currency movements.

The international price of oil is only the beginning of the calculation.

The bypass was supposed to reduce those risks

This is why alternative export infrastructure matters.

Every barrel moved around Hormuz helps.

It increases supply.

It reduces competition for replacement crude.

It provides Asian refiners with greater certainty.

It reduces the probability of outright shortage.

Eventually, greater supply should help restrain prices.

But that assumes the bypass can operate reliably.

A pipeline terminating at a port exposed to missile or drone attack cannot provide the same certainty as infrastructure operating in peacetime.

The oil may still move.

But risk has a price.

Insurance follows the missiles

The petroleum industry does not have to lose a tanker for an attack to become expensive.

Risk itself is sufficient.

Insurers reassess exposure.

War-risk premiums can increase.

Shipowners reconsider routes.

Crews require protection.

Cargo owners reconsider loading locations.

Banks financing shipments assess counterparty and geopolitical risk.

Contracts change.

All of this can happen without a single barrel being destroyed.

The additional costs eventually become part of the delivered price of energy.

Australia's vulnerability is therefore changing again

At the beginning of the Iran war, Australia's principal concern was straightforward.

Would enough oil and fuel reach international markets?

The world responded remarkably effectively.

Alternative crude was found.

Cargoes were rerouted.

Strategic reserves were released.

New logistics emerged.

The danger then became cost.

Replacement oil was available, but expensive to transport.

Now another layer is emerging.

Can the alternative infrastructure itself remain secure?

That is a much more consequential question.

Fujairah is strategically difficult to replace

The reason is geography.

The UAE pipeline to Fujairah is valuable precisely because its terminal sits outside Hormuz.

That cannot simply be recreated somewhere else next week.

Pipelines are enormously expensive infrastructure.

Ports require storage.

Loading facilities are specialised.

Tankers require safe anchorages.

Supply contracts have to be arranged.

Fujairah represents years of investment.

If its role is impaired, the international market cannot instantly construct another Fujairah.

Australia should understand the lesson

There is a direct Australian policy lesson here.

Our own fuel-security strategy is increasingly based on redundancy.

More reserves.

More diesel storage.

More jet-fuel storage.

Domestic refining capability.

Alternative liquid fuels.

Multiple international suppliers.

The logic is identical.

Do not depend upon one solution.

The Iran war demonstrates why.

When the primary route fails, the backup becomes essential.

When the backup becomes threatened, another backup is required.

Resilience comes from having options.

This strengthens the case for Australia's fuel reserve

The Federal Government's planned Australian Fuel Security Reserve should be considered in this context.

A strategic reserve does not produce fuel.

It cannot permanently replace imports.

It does something else.

It provides time.

If an international supply route is interrupted, stored fuel allows Australia to continue operating while suppliers find another route.

The global oil industry is demonstrating the value of precisely that flexibility right now.

But storage alone is not enough

Australia cannot solve its petroleum vulnerability simply by building tanks.

Eventually stored fuel is consumed.

Long-term resilience requires several components.

Reliable suppliers.

Domestic storage.

Domestic refining capability.

Alternative fuels.

Electrification where practical.

Efficient ports.

Strong relationships with Asian refiners.

And enough competition between supply routes that the failure of one does not become a national emergency.

The lesson of Hormuz is diversification.

The threat to Fujairah reinforces it.

There is also an aviation dimension

The UAE is one of the world's most important aviation centres.

Earlier attacks around Fujairah resulted in widespread flight disruption, including diversions and temporary airport closures.

Australia has extensive aviation links through the Gulf.

Dubai, Abu Dhabi and Doha form important gateways connecting Australians with Europe, Africa and the Middle East.

Any substantial expansion of the conflict into UAE territory therefore creates an aviation risk in addition to an oil-market risk.

Aircraft can reroute.

Airlines can adjust schedules.

But longer routes require more fuel and cost more money.

Again, geography eventually becomes economics.

Trade disruption can spread beyond oil

The UAE's suspension of trade and financial transactions with Iran is also important in its own right.

It demonstrates how war fragments commercial relationships.

Banks stop processing transactions.

Businesses lose customers.

Supply chains change.

Alternative intermediaries are required.

Shipping arrangements become more complicated.

The economic consequences of war therefore spread beyond the products directly affected by fighting.

That matters to Australia because the UAE is a significant international trading and logistics centre.

Dubai in particular functions as a commercial hub connecting markets throughout the Middle East, Africa and Asia.

The world's ability to adapt remains impressive

None of this means the international energy system is close to collapse.

Quite the opposite.

Its resilience has been extraordinary.

Saudi Arabia is moving oil through multiple routes.

The UAE continues exporting through Fujairah.

Asian refiners are buying American and African crude.

China's shipping companies have changed operating models.

Iraq is developing alternative export arrangements.

Governments are strengthening inventories.

The system keeps finding another answer.

That should provide Australians with some reassurance.

But every answer is becoming more complicated

This is the underlying concern.

Before the war:

Middle Eastern producer → tanker → Asian refinery → Australia.

Now it can become:

Middle Eastern producer → pipeline → alternative terminal → ship-to-ship transfer → tanker → Asian refinery → Australia.

Or:

American producer → tanker across a much longer distance → Asian refinery → Australia.

The product still arrives.

But every additional step introduces cost, time and another potential point of failure.

Complexity is the price being paid for resilience.

Australia may still get the fuel

That remains the most likely outcome.

Australia is a wealthy economy capable of competing internationally for petroleum products.

The government is strengthening reserves.

Global suppliers have strong financial incentives to sell fuel here.

The greater Australian risk is therefore increasingly not that every service station suddenly runs dry.

It is that Australia continues obtaining the fuel it needs at a persistently higher cost.

That is an economic rather than merely logistical problem.

And that returns us to inflation

Higher fuel costs increase freight costs.

Higher freight costs affect goods.

Higher aviation fuel costs affect travel and air freight.

Higher shipping and insurance costs affect imports.

Businesses eventually attempt to recover those costs.

That is how the Iran conflict can continue contributing to Australian inflation months after the initial oil shock.

The transmission mechanism is indirect.

But it is real.

The Times View

The world has spent months constructing ways around the Strait of Hormuz.

Fujairah has become one of the most important.

Its location outside the Strait allows UAE crude to reach international markets without requiring every tanker to enter the dangerous Gulf bottleneck.

Saudi Arabia is increasingly using alternative arrangements around the same area.

Chinese shipping companies are adapting their operations to collect Middle Eastern crude without sending their own tankers through Hormuz.

That system is helping keep Asian refineries supplied.

And those refineries help keep Australia supplied.

Now the security environment around that alternative system is deteriorating.

The UAE says two Iranian ballistic missiles appeared to target maritime traffic. Iran denies launching them. Abu Dhabi has responded by suspending trade, commercial exchanges and financial transactions with Iran.

This does not mean Fujairah has stopped functioning.

It has not.

Nor does it mean an Australian fuel shortage is imminent.

It is not.

But it changes the risk calculation.

The world found a way around Hormuz. It now has to protect the way around Hormuz.

For Australia, that is another reminder that fuel security cannot depend upon any single country, refinery, shipping lane, port or geopolitical workaround.

The Iran war has repeatedly demonstrated the same principle.

When one supply route fails, another can replace it.

But every alternative costs something.

And when the alternative itself enters the firing line, the value of genuine redundancy becomes clearer still.

Australia may be thousands of kilometres from Fujairah.

But if the crude feeding Asian refineries cannot move safely through it, the consequences can eventually arrive here — in our fuel prices, freight bills, airfares and inflation.