Understanding Iran, the Strait of Hormuz and what happens next

There's one more effect that doesn't get enough attention: buyers are massively pulling back from long-term contracting and shifting to spot purchases. On the surface, it looks like a sensible crisis response, but in practice, it means higher unit costs and a lack of predictability in planning.

What are the costs associated with increasing oil prices, beyond energy?

This is a question I love, because most people outside the industry think of oil purely as fuel. But oil is the foundation of the modern economy, a base raw material for hundreds of procurement categories. A rise in oil prices means more expensive plastics, and they are used in packaging, electronic components and automotive parts. It means more expensive fertilisers, because natural gas, which is closely tied to oil markets, is the primary feedstock for ammonia and urea production, and that directly hits food prices.

Pharmaceuticals become more expensive, as do synthetic textiles and construction materials. And of course, all road transport becomes more expensive, because diesel prices cascade through the entire distribution network.

The rule I apply: every 10 dollar increase in oil price per barrel translates to roughly 0.2-0.5% growth in operating costs for a typical industrial manufacturer. That might sound modest, but at the scale of global supply networks, we're talking hundreds of millions of dollars.

What are the indirect procurement expenses that might be associated with the closure of the Strait of Hormuz?

The Strait of Hormuz is the bottleneck through which roughly 20% of global oil demand flows, every single day. Closing it even for a few weeks would be a shock to the entire global economy.

But when we ask about indirect procurement costs, the picture gets even more complex. Tankers would need to be rerouted around the Cape of Good Hope, which adds 6,000 to 8,000 additional nautical miles to the route, an extra 12 to 18 days at sea, and two to four million dollars in additional cost per voyage.

On top of that, there are insurance costs. War risk insurance premiums alone can spike 500 to 2,000 per cent compared to normal rates. Companies also have to lock up working capital in strategic stockpiles, pay for more expensive hedging instruments and renegotiate contracts with new suppliers.

And please don't forget the cost of production stoppages. If raw materials don't arrive on time, the production line goes down, and contractual penalties will be payable to customers. The total bill can easily be several times higher than the energy cost itself.

Is there a long-term solution for sourcing oil from elsewhere?

Yes, but we need to be honest here. This is about decades-long and multi-billion-dollar investments, not the work of a few months. Short-term, we have several diversification options: the US and Canada with shale oil production, Brazil with deepwater oil production or oil production in West Africa and Norway. But none of these sources can fully replace the Persian Gulf in the short term.

The real, structural solution is the energy transition, such as the electrification of transport and the use of hydrogen or renewable energy. The problem is that there is a 15 to 20-year horizon if we're talking about a visible systemic effect.

What would I recommend right now? First, building strategic oil reserves, which is a standard practice under the IEA framework. Second, flexible contracts with swing suppliers, meaning suppliers who can dynamically scale up volumes when needed. Third, an active policy of onboarding new suppliers outside risk zones before a crisis hits, not during one. Diversifying oil sourcing is necessary, but it won't be sufficient without a deeper transformation of the entire energy model.

If people develop workarounds, will they be reluctant to abandon them when the conflict ends, to promote a focus on long-term resilience?

Honestly? No, and I think that's a good thing, provided we approach it consciously. From decision psychology, we know there's a strong anchoring effect at play. If a company survived a crisis thanks to an alternative supplier, built trust, procedures, and processes with them, then it's going to be hard to rationally justify going back to the previous arrangement.

On top of that, there's contractual inertia. Long-term agreements with new partners don't unwind without cost. But I see this primarily as a strategic opportunity. Instead of asking, ‘When do we return to normal?’ we should be asking, ‘What can we codify from these workarounds as permanent policy?’

My recommendation is straightforward. No critical category should have a single supplier with more than a 60% share. That should be written into procurement policy. Every crisis is a free stress test of supply chain resilience, and it would be foolish not to draw institutional lessons from it.

Are there any long-term stabilisation tactics that can be used?

I'd break this down into three levels. Strategically, over a three to 10 year horizon, three things are critical: geographical diversification of the supplier base away from risk zones, near-shoring and friend-shoring of critical production, and an energy transition that reduces exposure to oil in the first place.

At the operational level, over the next six to 24 months, every company should introduce mandatory dual or multi-sourcing for A and B category items under the Kraljic Matrix, build flexible contracts with swing clauses and deploy early warning tools.

More immediately, they can update supplier risk maps to include geopolitical dimensions, put business continuity plans in place for every critical category, and set up cross-functional war rooms to connect business units such as procurement, logistics, finance, and operations.

But let me say something that might be unpopular: the fundamental problem is that for the last 20 years, the industry has been optimising costs at the expense of resilience. Lean, single-source and just-in-time are models designed for a world without shocks. Covid, the war in Ukraine and conflicts in the Middle East have shown that resilience-by-design must be built into the architecture of the supply chain from the very beginning, not bolted on in crisis mode.