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By Tom O'Connor
Deputy Editor, National Security and Foreign Policy
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A suspected Iran-aligned Iraqi militia attack against Saudi Arabia's East-West pipeline has cut into a crucial oil artery serving as a bypass for disrupted Strait of Hormuz traffic in yet another challenge to the global energy order.
That's not just a challenge for the Kingdom, which is now surrounded on multiple fronts by Iran and its Axis of Resistance, but also U.S. consumers who are set to take another hit at home in the U.S.-Israeli war with the Islamic Republic.
"The East-West pipeline has been a godsend for Saudi Arabia and a key piece of infrastructure that’s kept fuel prices much lower than they would be otherwise," Jim Krane, fellow in Middle East Energy Studies and co-director of the Middle East Energy Roundtable at Rice University’s Baker Institute for Public Policy, told Newsweek.
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"So, it’s a serious problem for the world—U.S. drivers included—if the East-West Pipeline is closed, and even worse if the Strait of Hormuz is also closed," Krane said.
More problematic still, Iran's leverage on maritime chokepoints—including the Strait of Hormuz and potentially the Bab el-Mandeb, whose eastern flank was recently secured by Tehran's Yemeni ally, Ansar Allah, also known as the Houthis—means it may get to decide what comes next.
"The ball is in Iran’s court right now," Krane said. "Will it continue blocking Hormuz for maximum pain in oil markets? Or will it look the other way, even temporarily, while the repairs are done? The outage gives Iran a short burst of extra leverage."
They Did the Math
The disruption to the East-West pipeline, reportedly the result of an attack launched last Friday from Iraq, "is reducing the flow of Saudi oil by roughly seven million barrels a day to the market," Ed Hirs, lecturer specializing in economics and energy at the University of Houston, told Newsweek, referencing the pipeline's maximum reported capacity.
He placed the price elasticity of demand for oil at roughly -0.047, meaning that a 1 percent drop in the oil market would lead to a price hike of around 25 percent.
Back in January, the price of oil was around $56 per barrel. After the U.S. and Israel launched their war on Iran late the following month, the Islamic Republic's blockade of the Strait of Hormuz disrupted around 10 million barrels per day out of the market, with around an additional 1.5–2 million barrels of liquid hydrocarbons disrupted due to Iranian attacks that caused extensive damage to Qatar's LNG facilities.
U.S. releases from the Strategic Petroleum Reserve have amounted to around one million barrels per day, but the planned 172-million-barrel release announced in March is nearing completion with no further commitments. Multinational releases coordinated by the International Energy Agency, which have amounted to around 400 million barrels in total, are also approaching their limit.
Some relief is coming from reduced Chinese imports and increased oil flows from Venezuela, Guyana, Kazakhstan and the United Arab Emirates, but Hirs calculated that today, "we're roughly a couple of million barrels a day short, which gets us, using the price elasticity of demand, up to around $100-plus a barrel."
Refined products are especially vulnerable. For example, diesel has been trading between $175 and $190 per barrel and recently spiked to $200 per barrel, or roughly $5 per gallon, a trend Hirs said could be partially attributed to ExxonMobil chartering two tankers to export gasoline and diesel to Asian markets, with which U.S. consumers are now in direct competition.
"We're seeing impact, that's where it's come," Hirs said. "Cutting out the additional oil out from the market from the attack on the East-West pipeline will be reflected here in higher prices. It's just a matter of time."
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Why It Won't Get Better Anytime Soon
While Saudi Arabia has established a timeline of around three to six weeks to repair the crucial pipeline and has transferred some trade to Oman's Sohar port, the attack, along with others conducted from the south by Ansar Allah against various Aramco sites, has demonstrated that energy facilities on land are no more immune to the war than tankers being targeted by Iran at sea.
The pipeline may not even prove to be Riyadh's greatest challenge ahead, as Ansar Allah now presides over the Bab al-Mandeb, linking the Gulf of Aden to the Red Sea, thus providing a gateway to the Suez Canal. A blockade on this front could choke off an additional 8.1 million barrels per day, or roughly 10 percent of the world's seaborne oil trade.
And even if the war were to end tomorrow—and there's little indication it will—the effects are likely to be felt for some time.
"This is not something that can be easily taken care of," Hirs said, pointing out that Qatar is already looking at four to five years for restoring damaged LNG facilities.
Meanwhile, higher fuel prices could be felt in the U.S. for at least two to three years to come, he said. "That's barely enough time to build a new refinery."
Krane, for his part, viewed the impact of the Middle East crisis as part of a broader trend of energy emerging as a major arena of conflict in modern warfare, including Russia's war on Ukraine.
"The wars in Ukraine and Iran have been tough on energy, fossil fuels in particular," Krane said. "Power plants, tankers, pipelines and refineries are suddenly military targets. The results are visible at every corner gas station."
"Weaponizing energy has been a disaster for the global economy," he added.
The turmoil has also pushed import-dependent countries to wean themselves off their reliance on fuel given the volatile impact on inflation and transportation costs.
"They want more self-sufficiency in energy, and this often means electrification," Krane said. "Power prices tend to be way more stable than fuel prices, and power can usually be generated with less exposure to oil and gas markets. Countries are turning to renewables, nuclear and even coal to reduce their risk exposures."
"For those who can afford it, an electric vehicle provides immediate insulation from geopolitical risk," he added. "If you want to drive to work without worrying about pipeline explosions in the Middle East, drive an EV. They’re immune to these sorts of risks."
Contact Newsweek editors on this story: Samantha Beech and Gray R. Thomas
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