Oil prices are on track to record yet another weekly gain as the war in the Middle East continues with no resolution in sight. Exporters across the region are scrambling to diversify their export channels, while importers are rushing to diversify their suppliers. The oil market is being reshaped in a way that may well prove irreversible.

The Strait of Hormuz is one of the world's largest export routes for both crude oil and liquefied gas, historically carrying roughly a fifth of globally traded oil. Before the first U.S. and Israeli strikes on Iran, the strait handled close to 20 million barrels per day of crude oil exports from the Gulf states. Now, daily oil flows through the chokepoint are estimated at between 6 and 8 million barrels. The situation with LNG is even more severe: Qatar, the region's largest gas producer, is struggling to export even a portion of its output after declaring force majeure following damage to its Ras Laffan hub as Iran retaliated against the U.S. strikes.

There is, however, another export route out of the Middle East: the Bab el-Mandeb Strait, located on the opposite side of the Arabian Peninsula. Saudi Arabia moved quickly to take advantage of this, reversing the flow along its East-West pipeline so that oil moves not eastward toward Hormuz but westward to the port of Yanbu. The redirection has come at a cost, though, as Yanbu lacks the capacity to handle as much oil as the Persian Gulf ports—the East-West pipeline itself has a throughput ceiling well below the Gulf's combined loading capacity, making it a partial rather than full substitute.

The UAE has redirected its own flows to the port of Fujairah, which lies outside the Strait of Hormuz and is therefore less vulnerable to attack. The UAE has run into the same capacity constraint. ADNOC now plans to double the capacity of the pipeline carrying crude to Fujairah, but according to official plans this will not be completed until at least next year—a timeline that illustrates why supply rerouting of this kind cannot keep pace with a sudden wartime disruption.

In effect, every oil-exporting state with alternative routes is exploiting them, and those without such routes are planning to build them. This is certain to reshape regional oil export channels, with the Strait of Hormuz potentially losing its significance in the long run. That loss of significance will not happen in the near term, however, because building alternative export infrastructure takes time.

Importers are adjusting as well. Finland-based climate outlet CREA reported last month that the global total energy import bill swelled by $330 billion over the six months from March to August compared with expectations. In other words, the war between the United States and Israel on one side and Iran on the other drove oil and gas prices higher, adding a combined $330 billion to the cost of these imports—and prices continue to rise as it dawns on persistently optimistic traders that TruthSocial posts by President Trump cannot change the course of the war.

Both Brent crude and West Texas Intermediate are currently trading above $90 per barrel. Even if prices decline in the coming days and weeks, they may not fall as sharply as they did three months ago, when a single social media post could swing the market. That is the effect of the transformation now underway in oil markets—and that transformation carries a price.

Asian energy importers were historically the biggest customers of Middle Eastern oil and gas producers, thanks to favorable geography that translated into favorable prices. Now that these importers are forced to seek alternatives, they must pay more, because most alternative supply sources are geographically less convenient and tanker journeys to destination markets take longer—sometimes considerably longer. The shift echoes, in a different form, the rerouting Europe undertook after the 2022 invasion of Ukraine, when EU buyers scrambled to replace Russian pipeline gas with more distant and costlier suppliers.

Japan illustrates the trend. Before the war between the United States and Israel and Iran broke out, Japan sourced almost all of its crude oil imports from the Middle East—supplies vital to the resource-poor country. Once the war began, the Japanese government rushed to secure alternative suppliers, including the United States, Canada, African oil producers, and Azerbaijan. The cost has been steep: a record import bill of $76.39 billion for July, which is likely to be eclipsed by the August figure as Japan's reliance on more distant oil and gas suppliers deepens.

Japan is far from alone. Every energy-importing nation in Europe faces a similar position, not least because EU sanctions on Russian oil and gas have compounded the pain in the region. Meanwhile, China and India have boosted their imports of Russian crude to replace some suddenly unavailable Middle Eastern supply—a flow enabled by the discounted prices Moscow has offered since Western sanctions took effect.

The global oil and gas market is changing—fracturing, as some commentators have described it. Whether the transformation will be completed remains to be seen; doing so would require a further extension of the Hormuz disruption, a painful prospect. The silver lining, for whatever it is worth, would be a global oil export network less reliant on a couple of critical waterways that can be paralyzed by war—though it would also be a network carrying more expensive oil.

By Irina Slav for Oilprice.com