Pipe dreams

The Strait of Hormuz has been largely closed to maritime traffic since March, causing global trade disruptions and endless moaning about petrol prices. The world's oil producers have been hit hard and are understandably looking for alternative trade routes. A quarter of all seaborne oil normally passes through the strait, as well as a significant percentage of the liquified natural gas, fertiliser and chemicals critical to industrial production worldwide. The front door is closed; people are looking for a back passage, or perhaps an unlocked window, or even the chimney. Producers across the Gulf are exploring different possibilities, scrambling to dust off old pipeline blueprints and establish new ways to bypass the old channels. Many of these routes already exist but have remained dormant for decades due to the presence of more economically viable paths. Other options are more adventurous but fall apart the second any degree of scrutiny is applied. So what is the answer?

The old reliable: Saudi's East-West pipeline

If there is one route that gets wheeled out every time the Persian Gulf gets uppity, it is Saudi Arabia’s East-West Pipeline, aka the Petroline. The pipeline cuts 1,200 km across the Saudi desert, all the way from the eastern coast to the Red Sea port of Yanbu, bypassing the Strait of Hormuz entirely. Following the outbreak of hostilities earlier in the year, the system was beefed up to a capacity of 7 million barrels of oil per day, 5 million of which is destined for export. Unfortunately for Saudi Arabia, the main bottle neck is in fact the loading speed in Yanbu, which by some accounts may only reach 3 million BPD. With that said, the East-West pipeline remains an effective tool in the Saudi arsenal, enabling the gulf state to export the bulk of its daily oil production.

Problem solved? Nope. While Iran jealously guards the door to the Persian Gulf, Yemen occupies much the same role over in the Red Sea. Both bodies of water are only accessible via extremely narrow straits, control of which effectively limits passage in and out. On the one hand the Strait of Hormuz; on the other the Strait of Bab Al-Mandab. Trading one chokepoint for another is not the stroke of genius it sounds like. It’s like trading obesity for diabetes. The Houthis have launched a naval blockade of their own, targeting international shipping companies and attacking Saudi coastal sites. The Saudi Petroline itself was attacked by Yemeni drones back in 2019, so what the world is currently seeing is nothing new. As of the time of writing, naval traffic through the southern entrance to the Red Sea has fallen to around 30 commercial vessels per day, down from well over one hundred ships pre-conflict.

The Mediterranean push

Iraq finds itself in an even worse position. The country is almost entirely landlocked, possessing only a laughably short coastline on the Persian Gulf, through which 95% of its oil exports used to flow. Iraq has halved production compared to earlier in the year because it simply cannot export the oil quickly enough; its reserves are full to the brim; it is desperately looking for a release valve. Several options are available.

The first is the Kirkuk–Ceyhan line into Turkey, which allows Iraq to export a trickle of crude oil towards its northern neighbour. The main issue with this pipeline is that it traverses Kurdish territories, resulting in a geopolitical nightmare that has long plagued the oil trade in the region. The conflict in Iran has forced reality to the forefront however, and Baghdad has committed to aggressively scaling up daily oil flows from 200,000 barrels per day to 750,000.

A more nostalgic option would be to redevelop the old Kirkuk–Baniyas pipeline into Syria, a 900 km relic first completed all the way back in 1952. Unfortunately, the pipeline has seen more wars than the AK-47 and since the 2003 invasion of Iraq has been nothing more than a desert ornament. How much of the original pipeline can be salvaged remains to be seen, but the appetite to revive the old route remains high. A major consortium of international players, including Chevron, is currently gestating behind the scenes to start work on a massive series of parallel pipelines designed to move oil directly from Iraqi oil fields to the Mediterranean Sea. The project has a lot of weight behind it and if completed would allow the export of roughly 3 million barrels per day, enough to cover the bulk of Iraq’s daily oil production at its peak.

But here is the joke: both of these pipelines point in exactly the wrong direction. Let us remind ourselves that 80-90% of all oil exports leaving the Persian Gulf were destined for Asian markets. Oil that would normally sail east would instead have to travel overland to the Mediterranean, out through the Gibraltar Strait, all the way down Africa’s west coast, round the Cape of Good Hope and across the Indian Ocean to reach the same customers. It would be like driving from London to Cardiff but going via Glasgow. No one wants to go to Glasgow.

No way east

Back to the drawing board. Going south is out; going north benefits no-one; going west is a huge waste of time. Only one cardinal point left to try. If the vast majority of crude oil exports are destined for Asia, then why not simply head overland to the east? Short answer: because it is utterly impossible.

Constructing an oil pipeline between the Arabian Gulf and the Far East presents so many insurmountable challenges that no one on Earth is even considering the possibility. There are essentially only three ways to carry goods over land between Europe and East Asia. The first is to go via Russia, which many countries are seeking to avoid for obvious reasons. The second is to go via Iran, which many countries are seeking to avoid for even more obvious reasons. The third way is to thread the needle between these regional powers through the South Caucasus, a zone comprised of Georgia, Armenia and Azerbaijan. The region has been highly contested since the fall of the Soviet Union and remains on shaky ground to this day. The area could potentially serve as the perfect buffer zone, acting as a neutral trade corridor connecting the eastern and western hemispheres, and to a certain extent the South Caucasus already serves this purpose. International interests from the four corners of the globe converge on this narrow land passage, but local disputes cannot be brushed aside so easily. Azerbaijan and Armenia have yet to agree on a permanent peace treaty, while Georgia is largely viewed as having drifted too close to Russia.

As mentioned previously, getting crude oil out of Iraq and into Turkey is just about doable. From there, one might be forgiven for entertaining the possibility of transporting said crude oil to the Caspian Sea, and then on to East Asia. But here lies the problem: pipelines only flow in one direction. All the pipelines between Turkey and Azerbaijan are designed for one task and one task only: carrying oil and gas to the west, towards Europe.

Turkey is host to a number of different transport links, including the Kirkuk–Ceyhan line listed above, but also the Baku-Tbilisi-Ceyhan line, which does indeed take crude oil all the way from the Caspian Sea. The destination remains the same: the Mediterranean. Useless for the task at hand. Entirely new infrastructure would have to be built, passing through Kurdish and Caucasus lands alike. No one can be bothered with it.

Even if such a pipeline were to magically materialise, the problem then turns to the Caspian Sea, a body of water over which no fewer than five countries claim jurisdiction, including Iran and Russia. The oil would have to go from Baku, on the western edge of the inland sea, to either Turkmenistan or Kazakhstan. The Caspian is seismically active, with frequent mud volcanoes, flammable eruptions and transient islands; it would not be out of place in Mordor. The appetite for building such a pipeline is currently non-existent.

And even if that pipeline were to appear out of thin air, the problem then turns to Turkmenistan and Kazakhstan, which are home to some of the most inhospitable conditions on the planet. The first issue is the thousands of kilometres of rugged mountainous terrain beset by wild temperature swings, the second is the total lack of political will to begin infrastructure undertakings of the required magnitude. Turkmenistan is simply not interested. Kazakhstan has proven more flexible but will not do anything that risks rocking the boat with Russia, through which it currently exports around 80% of its crude oil.

Even if all the above were somehow achieved, there are still thousands of kilometres of Chinese territory to cross before a hypothetical pipeline could reach the eastern coast. There are innumerable challenges to overcome. Complete pipe dream.

Back to the drawing board, again

Every time a major chokepoint gets squeezed, the story plays out in the same way. Half-forgotten infrastructure gets rushed back into service, a series of previously written off routes enter the discourse, and then everyone realises why they were using the original routes to begin with. Trade routes are organic entities; they follow the path of least resistance. There is a reason why 90% of all trade travels by sea. The world’s oceans are its natural highways; avoiding them is a fool’s errand.

Consider the options. Option 1 is to spend decades building a pipeline across some of the worst terrain on Earth, through a dozen different nations, some of which may change their mind or undergo violent leadership changes halfway through completion, to end up with a solution that is by no means guaranteed to be any more stable than the original route. Option 2 is to put the kettle on and wait for everything to blow over.

The current system is not sufficiently broken to make other solutions even remotely viable. A few months of disruption is not enough to force the world to build alternative trade routes. All we can do in the meantime is have a nice collective tut at the petrol station.

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About the Author

Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS.

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