Iran and the United States have ended their fragile peace agreement, signed only a month ago , with the exchange of missile fire.
Once again, this halts the flow of oil and gas through the Strait of Hormuz and puts major oil importers like Australia on tenterhooks. And this time could be worse than before.
Ukraine's drone attacks on Russian refineries have forced Russia to halt its diesel exports , causing the price of diesel to soar.
The combination of these two events will tighten supplies of diesel. Australia is the world's largest importer of diesel, which we use to power long-range freight, mining and agriculture.
Cost of shipping oil to rise
This resumption of hostilities appears to be a battle over the control of shipping through the Strait of Hormuz. Tehran has fired missiles at ships navigating the strategic waterway near Oman's coast, instead of through Iran's preferred channel near its own coast, where it can collect a shipping fee.
The US has responded by proposing a 20% fee on the value of cargo for each ship passing through the strait.
For an oil tanker such as a Very Large Crude Carrier (VLCC) carrying two million barrels of oil at US$80(A$115) a barrel, or US$160(A$230) million in value - that equates to a fee of US$32(A$46) million payable to the US. This cost would likely be passed onto consumers.
Diesel facing tighter squeeze
The outbreak of the Iran and US-Israel conflict in February heavily affected diesel supplies. In early April, benchmark diesel prices in Asia hit a record level of more than US$232 (A$334) a barrel, more than double the global oil price of around US$110 ($A158) a barrel at the time.
The combination of a closed strait and a dearth of Russian diesel will trigger further volatility. Singapore Gasoil, the primary price benchmark across the Asia-Pacific, was up almost 6% at US$131 (A$188) per barrel on Tuesday.
A tighter global diesel market has concerning implications for Australia, the world's largest importer of diesel. Although we are not the world's largest consumer of diesel, the closure of around three-quarters of our refining capacity in the 20 years to 2021 , has left Australia dependent on imports for 80% of its oil product consumption.
The absence of Russian diesel does not affect Australia directly as it has sanctions on Russian energy, like many countries in the Organisation for Economic Co-Operation and Development (OECD). But countries such as Turkey, China, Brazil and Singapore are buyers of Russian oil products . These countries will now be competing with Australia for diesel in a tighter market.
Depleted global reserves
In addition, US strategic oil reserves are at their lowest levels since 1983 after it contributed to the International Energy Agency (IEA)'s stock release of 400 million barrel to global markets. A repeat of a release on this scale is no longer an option.
So far, Australia has been relatively successful in sourcing diesel, petrol and jet fuel from other partners. There have only been sporadic shortages , with queuing at petrol stations limited to the early days of the conflict.
However, Australia still has relatively thin oil stockpiles. We are at 50 days of net imports, the same as it was at the end of December. This is well below the 90-day level required for members of the IEA.
Even on the federal government's preferred metric of the Minimum Stockholding Obligation (MSO) , which tracks storage levels of diesel, petrol and jet fuel, actual volumes have declined. But the government prefers to focus on another metric called "consumption cover days": the number of days domestic fuel supplies would last at normal daily consumption rates. This has actually risen, which suggests Australians are using less fuel.
The latest official data from the Australian Petroleum Statistics (APS) on consumption show petrol, jet fuel and diesel consumption have each dropped(8.2%, 6.6% and 2.1% respectively) in the month of April, compared with last year.
What about consumers?
The longer the Strait of Hormuz is closed and Russian diesel exports are offline, the more likely it is Australian motorists will again feel increasing pain at the fuel pump.
The promise of a long-term solution to this conflict remains only a distant goal, with both sides showing a willingness to battle over the Hormuz Strait.
The present uncertainty is exacerbated by the US failing to have any long-term strategy plan when it embarked on its missile attacks on Iran with Israel. However, Iran's ecomomy is weakening given its reliance on oil exports, which have declined to a trickle. They are not in a strong position to maintain a long conflict.
Both the US and Israel face important elections before the end of the year that could lead to both countries changing their approach.
Kevin Morrison works as an energy analyst for the Institute of Energy Economics and Financial Analysis (IEEFA).
