The Hormuz conflict enters a more dangerous phase — and Australia will pay for every voyage

The conflict around Iran and the Strait of Hormuz has entered a more dangerous phase, with the United States attacking Iranian oil tankers and Iran claiming a large retaliatory assault against commercial shipping.

This is no longer principally a contest over whether the narrow waterway can be declared open or closed.

It is becoming a contest over whether shipowners, insurers and crews can be persuaded to enter it at all.

The United States says it sank five Iranian oil tankers after attacks on American naval vessels. Iran’s Revolutionary Guards subsequently claimed to have attacked ten ships near Hormuz, including two US Navy vessels and eight oil tankers.

American officials disputed Iran’s claims concerning damage to their warships, but merchant vessels were reportedly struck across a widening area that included the Gulf of Oman and waters near Iraq and the United Arab Emirates. At least one seafarer was reported killed and another missing following an attack on the tanker Hercules Star.

Iran also launched ballistic missiles towards a base used by American forces in Jordan. Most were reportedly intercepted and the United States said none of its personnel was injured.

The individual claims of the combatants will require continuing verification. The larger development is already apparent: both sides are now treating oil tankers and the maritime energy trade as instruments of war.

Brent crude closed above US$100 a barrel following the attacks, reaching US$101.21. It was the first settlement above that threshold since May and approximately 25 per cent higher than at the beginning of August. Reuters

For Australia, the consequences will not remain in the Middle East.

They will arrive in the price of every affected voyage.

A shipping lane can be open but unusable

Iran does not need to place a permanent physical barrier across the Strait of Hormuz to disrupt the world’s energy supply.

Nor must it sink every tanker attempting the passage.

It need only establish that a tanker may be attacked.

Once that risk becomes credible, insurers increase their premiums, shipowners demand higher freight charges, crews become more reluctant to sail and oil buyers search for alternative supplies. Some vessels will divert, some cargoes will be delayed and others may not sail at all.

An Emirates National Oil Company executive has reportedly estimated that war-risk premiums can now reach as much as 10 per cent of a cargo’s value. Insurance alone can account for another six per cent, potentially adding about US$10 million to the cost of moving one cargo.

Total additional transit costs for a voyage through the area have been estimated at between US$10 million and US$20 million. Some participants are reportedly considering transporting cargo without insurance because cover has become so expensive. Reuters

That is an extraordinary commercial decision. Sailing without insurance does not remove the risk. It transfers the entire risk to the shipowner, cargo owner or national government behind the voyage.

A shipping lane is not genuinely open merely because a vessel can enter it. It is open only when people are willing to sail through it.

Why Australia is exposed

Australia is a major exporter of coal and natural gas, but it remains heavily dependent on imported liquid fuels.

The country imports most of the petrol, diesel and aviation fuel it consumes. Much of that finished fuel comes from refineries in countries such as Singapore, South Korea, Japan, Malaysia and Brunei.

This can create the impression that Australia is insulated from the Middle East because a tanker arriving here may have sailed from an Asian port rather than the Persian Gulf.

The supply chain does not begin at the port printed on the delivery documents.

Asian refineries acquire crude oil from international markets, including substantial volumes produced in the Middle East. They pay global crude prices, refining costs, freight charges and insurance. Those expenses are incorporated into the price of the refined fuel eventually sold to Australia.

Even an Australian fuel cargo that has never passed through Hormuz can become more expensive because another cargo has been delayed, diverted or made commercially dangerous.

Oil is a global market. A serious obstruction in one of its most important arteries raises the value of supply everywhere.

The first effect will be price

The most immediate Australian consequence is likely to be higher wholesale fuel costs rather than a national shortage.

Australian retail petrol prices are influenced by regional refined-fuel benchmarks, the price of crude oil, the Australian dollar, taxation, transport costs and local retail competition.

Brent above US$100 does not translate instantly or mechanically into a particular price at every Australian service station. Existing inventories were purchased earlier, retail price cycles vary between cities and regional distribution costs differ.

Nevertheless, a sustained increase in crude and shipping costs eventually flows through the system.

A weaker Australian dollar would amplify that pressure because oil and refined fuels are predominantly traded in US dollars. Australia can therefore be affected by both a higher international oil price and an unfavourable exchange rate at the same time.

Remote and regional communities can be affected disproportionately. Fuel must travel further after reaching an Australian port, local competition may be limited and smaller outlets cannot always absorb sharp wholesale movements.

The motorist sees the final number on the service-station sign. Behind it lies a chain stretching from oilfields and foreign refineries to tankers, insurers, terminals, road transport and retailers.

Diesel spreads the cost through the economy

The effect will not be confined to household motoring.

Diesel powers much of Australia’s freight, farming, mining, construction and regional economy. It operates trucks, agricultural machinery, generators and industrial equipment.

When diesel becomes more expensive, the increase does not remain at the fuel pump. It enters the cost of transporting food, building materials, consumer goods and industrial inputs.

Businesses may initially absorb some of the increase. If elevated prices persist, they must eventually reduce margins, increase prices, postpone investment or pass the cost to customers.

That is why an oil shock behaves differently from a discretionary consumer purchase. Fuel is embedded in the movement of almost everything else.

Its economic effect is parasitic: it extracts money at repeated stages of production and distribution without creating a corresponding increase in the quantity of goods delivered.

Airlines and travellers will also pay

Aviation fuel is exposed to the same international energy and shipping pressures.

Airlines generally use hedging arrangements to moderate sudden price changes, meaning the effect may not be immediate or uniform. Hedging can delay an increase, but it cannot permanently protect an airline from a prolonged rise in the underlying price.

Higher jet-fuel costs can eventually contribute to more expensive airfares, reduced discounting, additional surcharges or pressure on marginal routes.

Regional aviation is particularly sensitive because thinner passenger volumes make it harder to spread increased operating costs. Tourism businesses in Cairns, the Whitsundays, Noosa, Byron Bay and other destinations can consequently be affected even though the conflict is geographically distant.

Visitors may face higher costs to fly, drive or hire vehicles. Operators then encounter higher expenses for transport, food deliveries, tours and marine fuel.

The economic consequences radiate well beyond the service station.

Inflation and interest rates

A renewed fuel-price surge would complicate Australia’s inflation outlook.

The Reserve Bank cannot produce oil, insure tankers or protect the Strait of Hormuz. Increasing Australian interest rates would not cause a single additional ship to pass safely through the waterway.

The RBA must nevertheless consider the domestic consequences.

Higher fuel prices directly affect the Consumer Price Index and indirectly increase the cost of transporting and producing other goods. If businesses and workers begin to assume those increases will continue, the shock can influence wages, contracts and inflation expectations.

The distinction between a temporary price shock and persistent inflation is therefore important.

The Reserve Bank may look through a brief increase in petrol prices if the broader economy remains subdued. It becomes more difficult to ignore if expensive energy repeatedly passes into other prices and prevents underlying inflation from returning sustainably to the target range.

Australian borrowers could therefore suffer twice: first through higher fuel and household costs, and later through interest rates remaining higher for longer than they otherwise would.

It would be an uncomfortable response to an imported problem. Monetary policy cannot cure the cause, but the RBA is responsible for containing the consequences.

Supply is a different question from price

Expensive fuel and unavailable fuel are not the same problem.

Australia can continue receiving petrol and diesel while paying considerably more for them. A genuine physical shortage would require longer interruptions, cancelled cargoes, refinery difficulties or competition in which supplying countries prioritised their own requirements.

Earlier in the conflict, the Australian government said the country’s supply remained adequate despite cancelled Asian shipments and some localised shortages. Australia’s two remaining refineries were operating, and incoming vessels continued to arrive.

The government subsequently announced a $10 billion fuel-security and resilience package, including a permanent government-owned reserve of approximately one billion litres and measures intended to lift onshore holdings to at least 50 days. Reuters

Those measures provide a larger buffer, but a reserve is not a source of permanently renewable supply.

Stored fuel can help manage interruptions and direct product towards essential users. It cannot isolate Australia from a prolonged global price shock, nor replace the continuing arrival of tankers.

Stockpiles buy time. They do not manufacture energy independence.

Australia’s two-refinery vulnerability

Australia now has only two major operating oil refineries: Ampol’s Lytton refinery in Brisbane and Viva Energy’s refinery at Geelong.

Together, they supply only a minority of national fuel demand. They are also not automatically independent of world events merely because they operate in Australia. Domestic refineries still require appropriate crude or feedstock and remain exposed to international pricing.

Building additional refining capacity would therefore not, by itself, make Australia self-sufficient. The country would still need secure access to crude oil suitable for those facilities.

However, domestic refining can provide greater flexibility, industrial capability and an additional layer of resilience when international supply chains are disrupted.

The policy question is not as simple as choosing between imported fuel and an entirely self-sufficient Australia. It is whether the savings achieved through efficient international supply chains adequately compensate for the strategic vulnerability created by depending upon them.

Fertiliser and food production

The risk also extends beyond fuel.

Australia imports significant quantities of urea, which is used as nitrogen fertiliser and as diesel exhaust fluid for trucks and machinery.

Middle Eastern conflict can increase the cost of fertiliser through higher natural-gas prices, reduced production, disrupted shipping and competition for alternative suppliers.

Farmers can therefore be affected through both sides of their operations: diesel becomes more expensive while fertiliser and transport costs also increase.

Those costs may eventually be reflected in food prices, particularly if the disruption continues across planting, harvesting or freight cycles.

This is how a maritime conflict thousands of kilometres from Australia can reach a supermarket shelf.

The world’s alternatives are limited

Oil can be redirected through pipelines and loaded at ports outside the Strait, while producers elsewhere may increase output. Strategic reserves can also be released to ease acute shortages.

None of these alternatives can quickly or completely replace the enormous volume normally associated with the Persian Gulf.

Longer routes consume more fuel, occupy tankers for additional time and reduce the number of vessels available for other cargoes. Alternative suppliers also respond to higher global prices rather than offering Australia immunity from them.

The existence of another route does not mean that the alternative carries the same volume at the same speed and cost.

The Strait of Hormuz matters because geography has concentrated an extraordinary share of the world’s energy trade into a narrow passage. Markets may adapt around it, but they cannot pretend it does not exist.

What Australians should watch

The most important indicators are now:

• whether attacks on commercial vessels continue or widen;
• whether tanker owners begin refusing Hormuz voyages;
• the cost and availability of war-risk insurance;
• actual shipping movements rather than political declarations that the Strait is open;
• Brent crude and Asian refined-fuel prices;
• the Australian dollar against the US dollar;
• cancellations or delays affecting fuel shipments from Asian refineries;
• Australian diesel inventories and regional supply interruptions; and
• whether the conflict reaches ports, refineries, pipelines or alternative Red Sea routes.

A single day above US$100 does not establish a permanent new oil price. Repeated attacks and sustained reluctance among shipowners would be more consequential than the daily movement of futures markets.

The Times View

The latest escalation is significant because the United States and Iran are no longer merely threatening the energy trade around Hormuz. Oil tankers themselves have become targets and instruments of retaliation.

Australia cannot control that conflict. It cannot order foreign crews into dangerous waters, set international insurance premiums or instruct Asian refineries to place Australian customers ahead of their own countries.

What it can do is recognise the nature of its exposure.

Australia’s vulnerability is not simply that fuel may one day run out. It is that every stage required to keep fuel arriving can become more expensive long before supplies cease.

The Strait of Hormuz does not need to be completely closed to impose a cost on Australia.

Fear can restrict a waterway before any navy does—and Australians will pay for that fear in every cargo willing to make the voyage.