Can Australia dodge the next Iran oil shock?

For decades, Iran’s greatest perceived threat to the world lay in its nuclear ambitions. But now, the conflict in the Middle East has highlighted another source of power it has quietly possessed all along: the ability to turn off the oil tap.

Shipping through the Strait of Hormuz – the narrow waterway that carries one in every five barrels of oil traded worldwide – has ground back to a near-total standstill this week after a fresh wave of Iranian strikes on oil and natural gas tankers. Using relatively inexpensive drones and sea mines, Tehran has demonstrated how quickly it can paralyse one of the world’s most critical trade routes, driving up crude oil prices and sending the cost of filling up a petrol tank soaring everywhere – as far as 10,000 kilometres away in suburban Sydney and Melbourne.

The extraordinary leverage Iran has displayed over the global economy has sounded alarm bells that extend well beyond the current conflict and is forcing the world’s energy system to adapt to a new geopolitical reality.

“Call it an inflection point,” says Greg Bourne, a former president of oil giant BP’s Australasian business and now a member of the Climate Council. “The Iranians are not going to back down and give up a strategic asset like the Strait of Hormuz now – they are going to use it again and again and again.”

The immediate response to the crisis has been a scramble to keep oil flowing. Governments have coordinated unprecedented releases from emergency fuel reserves, promoted or mandated fuel-conservation measures, and sought to maximise every available alternative export route to move crude out of the Gulf. These mainly include Saudi Arabia’s East-West pipeline to the Red Sea port of Yanbu, and another bypass that runs through the United Arab Emirates, connecting Abu Dhabi’s oil fields to the port of Fujairah.

But it’s not enough, so policymakers and energy companies are also investigating larger-scale plans for new ports and pipeline networks that could reduce their long-term reliance on the trade route, Monash University Business School economics professor Joaquin Vespignani says.

“Similar to how Europe diversified gas supplies following Russia’s invasion of Ukraine, Gulf producers are increasingly looking to diversify export routes to reduce geopolitical risk,” Vespignani says. “The recent Iran-Israel-US tensions have reinforced concerns that even temporary disruptions to Hormuz can generate substantial price volatility.”

Across the oil-rich region, governments are committing billions of dollars to that effort. The UAE is expanding pipeline and export capacity through Fujairah on the Gulf of Oman, and Saudi Arabia is once again examining ways to increase east-west pipeline capacity to the Red Sea.

Dubai logistics giant DP World has reportedly begun discussions with UAE authorities to build a new multipurpose port and container terminal in Fujairah, while Chevron is also said to be assessing a vast new pipeline network proposal from southern Iraq to Kirkuk and through Syria to the Mediterranean, according to reports last week.

Whether such workarounds can reduce Iran’s leverage before the next regional crisis is another question. “Expanding existing pipelines or terminals can generally be achieved within two to five years,” Vespignani says. “Developing entirely new cross-border pipeline systems is a much longer process, typically five to 10 years or more.”

Even then, he adds, diversification would reduce Tehran’s stranglehold over exports rather than eliminate the risk. “The key benefit is that diversification lowers the probability that a single disruption can remove a large share of global oil exports from the market,” he says.

For Australians, the episode has exposed an uncomfortable reality. Despite its vast energy resources, the country remains heavily dependent on imported liquid fuels and has been vulnerable to this year’s global price swings. Most of the petrol and diesel used by Australian motorists, freight operators, miners and farmers is refined in Asia using crude oil sourced largely from the Middle East – much of which must first pass through the Strait of Hormuz.

There are ways Australia can reduce its exposure to the threat. One priority will be larger strategic fuel reserves. Before the conflict, Australia held its largest fuel reserves in years, but they still fell well short of the International Energy Agency’s recommendation for member nations to hold reserves equivalent to 90 days of net imports.

The Albanese government has since announced a $10 billion package to boost minimum stockholding obligations – a requirement for oil refiners and fuel importers to hold designated baseline fuel stocks on Australian soil – and establish a government-owned 1-billion-litre reserve. While bigger inventories will not shield motorists from global prices, they could prevent shortages if shipping were disrupted again.

Australia has also been working to diversify its fuel import chains and has secured additional shipments from around the world this year, including from North America and Europe, to reduce the nation’s heavy reliance on Asia.

Yet, the most durable response may be to reduce dependence on oil altogether. Every electric vehicle replacing a petrol-powered car marginally lowers Australia’s exposure to global crude markets. Expanding renewable energy and battery storage similarly lowers the need for natural gas, another commodity that is in shorter supply and is more expensive globally since the Iran war began.

Climate advocates insist that a faster shift away from volatile, globally traded fossil fuels towards domestic renewable energy independence is the only true way to reduce Australia’s vulnerability. Bourne argues that even vast new pipeline networks bypassing Hormuz cannot end the threat entirely, as every kilometre of new infrastructure simply creates another potential target.

“If you take a pipeline 500 kilometres across Saudi Arabia, that’s 500 kilometres of opportunity and another choke point,” he says. “A round, cylindrical and very, very long choke point.”

The only lasting way to weaken Iran’s leverage is not to find another route for oil, he says, but to need less of it.

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