The challenge facing the global oil market is no longer limited to the availability of crude oil in producing regions. Increasingly, it is tied to the safety of the routes through which crude and refined petroleum products reach global markets.
Whenever instability spreads around a key maritime chokepoint or export corridor, the cost of risk rises, even if global production itself does not decline proportionately.
This helps explain an important part of Brent crude's climb above $100 per barrel. After months during which prices remained in the $70-$90 range, the risk premium began to rise as shipping disruptions emerged in the Strait of Hormuz.
The premium expanded further as unrest spread to the Bab el-Mandeb Strait and alternative oil transport routes. As overland supply lines and other maritime corridors also came under threat, oil prices crossed the $100-per-barrel threshold.
This development coincided with attacks by Yemen's Iran-backed Houthi movement on shipping traffic in the Bab el-Mandeb region, while Saudi Aramco's East-West pipeline came under attack from southern Iraq. The pipeline is one of the principal routes used to transport Saudi oil to the Red Sea coast.
As a result, risks are no longer confined to the Strait of Hormuz. They have extended to one of the world's most important maritime passages and to alternative transportation routes, strengthening the oil market's risk premium and pushing prices beyond $100 per barrel.
At the same time, it has become increasingly clear that oil market challenges are broadening amid other conflicts involving major powers. In an interview with Fox News before the Houthi actions around the Bab el-Mandeb Strait, US Energy Secretary Chris Wright stated that the current problem lies in the limited availability of global refining capacity.
He noted that approximately 8 to 9 million barrels per day pass through the Strait of Hormuz, in addition to around 6 million barrels per day transported via pipelines. According to Wright, about 15 million barrels per day were being exported before the disruptions in Bab el-Mandeb, but that figure has since fallen to less than 10 million barrels per day.
The challenges facing the global oil industry are not limited to shortages in crude oil supplies.
The sector is also struggling to secure adequate supplies of refined petroleum products, such as diesel, because of damage recently sustained by Russian and Ukrainian refineries, which has reduced global refining capacity.
For example, Russia's Ust-Luga refinery on the Baltic Sea, one of the country's most important refining facilities, came under attack. The reciprocal strikes on Russian and Ukrainian refineries have contributed to shortages of diesel supplies in Europe.
Consequently, the global oil industry is currently confronting several challenges simultaneously: reduced oil supplies from the Arab Gulf states, disruptions to shipping schedules and maritime transport for much of those supplies, and difficulties obtaining sufficient quantities of refined petroleum products such as diesel, particularly in the European market.
These developments are also having adverse effects on Middle Eastern economies and markets. Some Arab countries have begun reporting shortages of food products that were previously shipped overland from Europe to their markets, while air travel fares to and from Europe have also risen significantly.
